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THE

LEBANON BRIEF

ISSUE 928

Week of 20-25 July, 2015

ECONOMIC RESEARCH DEPARTMENT

BLOMINVEST Bank Headquarters

Bab Idriss, Beirut, Lebanon

T (01) 991 784/2 F (+961) 1 991 732

[email protected]

www.blom.com.lb

S A L

ISSUE 928; Week of 20-25 July, 2015

S A L

TABLE OF CONTENT

FINANCIAL MARKETS 3

Equity Market 3

Foreign Exchange Market 5

Money & Treasury Bills Markets 5

Eurobond Market 6

ECONOMIC AND FINANCIAL NEWS 7

BDL’s Total Assets Stood at $91.13B by Mid-July 7

Deflationary Pressures on the Lebanese Economy in H1 2015 8

6-Year Low Continued to Characterize Building Permits in H1 9

Declining Demand Putting a Toll on Total Real Estate Transaction By June 10

Airport Passengers Improved by 6.49% by June 10

CORPORATE DEVELOPMENTS 11

EuroMena Fund Sold its Share in Chedid Capital Holding 11

Bank Audi Consolidated Profits Rose by 6.52% to $202.09M in H1 2015 11

FOCUS IN BRIEF 12

International Monetary Fund’s Article IV Consultation for Lebanon – 2015 12

This report is published for information purposes only. The information herein has been compiled from, or based upo n sources we believe to be

reliable, but we do not guarantee or accept responsibility for its completeness or accuracy. This document should not be cons trued as a

solicitation to take part in any investment, or as constituting any representation or warranty on our part. The consequences of any action taken

on the basis of information contained herein are solely the responsibility of the recipient .

The Lebanon Brief of 16


S A L

FINANCIAL MARKETS

Equity Market

Stock Market

24/07/2015 16/07/2015 % Change

BLOM Stock Index* 1,182.88 1,189.72 -0.57%

Average Traded Volume 318,416 200,699 58.65%

Average Traded Value 2,316,147 1,375,911 68.34%

*22 January 1996 = 1000

The Beirut Stock Exchange (BSE) reversed its

upward trend this week, with the BLOM Stock

Index (BSI) dropping 0.57% to 1,182.88 points. The

average traded volume and value grew from last

week’s 200,699 shares worth $1.38M, to 318,416

shares worth $2.32M. Accordingly, the market

capitalization decreased from $10.02B to $9.96B.

The BSI however managed to outperform the

Morgan Stanley Emerging Markets Index (MSCI)

which lost 1.54%. Meanwhile the S&P Pan Arab

Composite Large-Mid-Cap Index and the S&P AFE

40 Index gained weekly 0.42% and 0.37%,

respectively.

On the regional front, the top performing bourse

was the Egyptian bourse which gained 4.31% and

was followed by the Dubai bourse which grew by

2.42% and the Abu Dhabi bourse which added a

weekly 1.87%.

The BSE was the worst performer, followed by

Qatar and Bahrain, with weekly losses of 0.54%

and 0.07%, respectively.

Back to the Beirut Stock Exchange, and in the

banking sector, Audi listed shares were the only

common shares to close in the green with a 3%

weekly upturn to $6.19, partly due to the release of

their financials which revealed a positive

performance during the 1st half of 2015. In

contrast, BLOM listed shares, Audi GDR share, and

Byblos listed shares dropped 1.03%, 3.06%, and

0.62% to end the week at $9.6, $6.01, and $1.6,

respectively.

On the other hand, the preferred shares exhibited a

progress, where the BLOM Preferred Stock Index

(BPSI) added a weekly 0.23% to 104.85 points. In

details, the preferred shares of Audi class “G”,

Byblos 08, and BLC class “A” improved 0.4%, 1.3%

and 1.1% to $100.5, $101.5, and $101.1,

respectively. Similarly, Bank of Beirut Preferred

shares class “H” added 0.39% to $25.6. Byblos

preferred 09 shares were the only preferred shares

to end the week in the red, sliding by 0.2% to

$100.7.

Banking Sector

Mkt 24/07/2015 16/07/2015 % Change

BLOM (GDR) BSE $10.00 $10.00 0.00%

BLOM Listed BSE $9.60 $9.70 -1.03%

BLOM (GDR) LSE $9.90 $10.00 -1.00%

Audi (GDR) BSE $6.01 $6.20 -3.06%

Audi Listed BSE $6.19 $6.01 3.00%

Audi (GDR) LSE $6.10 $6.20 -1.61%

Byblos (C) BSE $1.60 $1.61 -0.62%

Byblos (GDR) LSE $80.50 $80.50 0.00%

Bank of Beirut (C) BSE $18.40 $18.40 0.00%

BLC (C) BSE $1.70 $1.70 0.00%

Fransabank (B) OTC $27.00 $27.00 0.00%

BEMO (C) BSE $1.90 $1.90 0.00%

Mkt 24/07/2015 16/07/2015 % Change

Banks’ Preferred

Shares Index *

104.85 104.61 0.23%

Audi Pref. E BSE $102.20 $102.20 0.00%

Audi Pref. F BSE $100.50 $100.50 0.00%

Audi Pref. G BSE $100.50 $100.10 0.40%

Audi Pref. H BSE $100.60 $100.60 0.00%

Byblos Preferred 08 BSE $101.50 $100.20 1.30%

Byblos Preferred 09 BSE $100.70 $100.90 -0.20%

Bank of Beirut Pref. E BSE $25.50 $25.50 0.00%

Bank of Beirut Pref. I BSE $25.50 $25.50 0.00%

Bank of Beirut Pref. H BSE $25.60 $25.50 0.39%

BLOM Preferred 2011 BSE $10.15 $10.15 0.00%

BEMO Preferred 2013 BSE $101.10 $100.00 1.10%

* 25 August 2006 = 100

1150

1170

1190

1210

1230

1250

Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15

BLOM Stock Index HI: 1,236.40

LO: 1,159.48



S A L

Real Estate

Mkt 24/07/2015 16/07/2015 % Change

Solidere (A) BSE $11.40 $11.91 -4.28%

Solidere (B) BSE $11.40 $11.61 -1.81%

Solidere (GDR) LSE $11.30 $11.60 -2.59%

On the London Stock Exchange, Solidere GDRs

lost 2.59% to $11.30. GDRs of Bank Audi and

BLOM Bank declined weekly by 1.61% and

1.00% to $6.1 and $9.90, respectively.

Manufacturing Sector

Mkt 24/07/2015 16/07/2015 % Change

HOLCIM Liban BSE $14.90 $15.20 -1.97%

Ciments Blancs (B) BSE $3.02 $3.02 0.00%

Ciments Blancs (N) BSE $2.75 $2.75 0.00%

In the real-estate sector, Solidere shares classes

“A” and “B” dropped 4.28% and 1.81% to close

at the same price of $11.4, despite the

company’s optimistic expectations for its H1

results as stated during the analyst day, which it

holds annually for equity analysts and capital

markets agents.

In the industrial sector, HOLCIM shares lost

1.97% to $14.90.

For the coming week, the BSI will probably be

affected by the mid-year results of the listed

banks, which are expected to be released during

the week.

Funds

Mkt 23/07/2015 15/07/2015 % Change

BLOM Cedars Balanced

Fund Tranche “A” -----

$7,539.18 $7,559.73 -0.27%


Fund Tranche “B” -----

$4,980.78 $4,995.47 -0.29%


Fund Tranche “C” -----

$5,726.06 $5,741.67 -0.27%

BLOM Bond Fund ----- $9,507.13 $9,507.13 0.00%

Retail Sector

Mkt 24/07/2015 16/07/2015 % Change

RYMCO BSE $3.23 $3.23 0.00%

ABC (New) OTC $27.00 $27.00 0.00%

Tourism Sector

Mkt 24/07/2015 16/07/2015 % Change

Casino Du Liban OTC $323.00 $323.00 0.00%

SGHL OTC $7.00 $7.00 0.00%



S A L

Foreign Exchange Market

Lebanese Forex Market

24/07/2015 16/07/2015 %Change

Dollar / LP 1,505.00 1,508.00 -0.20%

Euro / LP 1,649.51 1,641.22 0.51%

Swiss Franc / LP 1,568.03 1,575.56 -0.48%

Yen / LP 12.16 12.15 0.08%

Sterling / LP 2,335.42 2,353.96 -0.79%

NEER Index** 165.97 165.82 0.09%

*Close of GMT 09:00+2

**Nominal Effective Exchange Rate; Base Year Jan 2006=100

**The unadjusted weighted average value of a country’s currency relative to all major

currencies being traded within a pool of currencies. The NEER represents the

approximate relative price a consumer will pay for an imported good.

Demand for the dollar in the Lebanese Forex market

declined during the week as the Lebanese pound’s peg

against the dollar went from 1,506–1,510 with a mid-price

of $/LP 1,508 to $/LP 1,503–1,507 with a mid-price of $/LP

1,505. Foreign assets (excluding gold) at the Central Bank

grew by a monthly 0.7% to reach $38.86B at the end of

June. As for the dollarization rate of private sector

deposits, it slid from 65.71% in December 2014 to 65.15%

by May.

Nominal Effective Exchange Rate (NEER)

The euro recovered against the dollar by 0.51% to stand at

€/$ 1.0942, on Friday 24th of July. This probably came after

Athens avoided default on the ECB by tapping into a 7

billion-Euro bridge loan, which might have put food for

thought about the improvement of the situation in Europe.

Gold continued its bearish trend over the week, as the prices

dropped from last week’s $1,143.96/ounce to $1,079.46/ounce

today at 12:30 pm, Beirut time. This is possibly due to the world's

largest gold producer (China) stockpiling gold reserves at a slower

pace than previously thought, keeping gold investors on their toes.

Furthermore, a strong dollar might be holding the yellow metal as

well.

By Friday 24th of July, 2015, 12:30 pm Beirut time, the

dollar-pegged LP depreciated against the euro going from

€/LP 1,641.22 to €/LP 1,649.51. The Nominal effective

exchange Rate (NEER) increased by a weekly 0.09% to

165.97 points, bringing its year-to-date gains to 12.66%.

Money & Treasury Bills Markets

Money Market Rates

Treasury Yields

24/07/2015 16/07/2015 Change bps

3-M TB yield 4.39% 4.39% 0

6-M TB yield 4.87% 4.87% 0

12-M TB yield 5.08% 5.08% 0

24-M TB coupon 5.84% 5.84% 0

36-M TB coupon 6.50% 6.50% 0

60-M TB coupon 6.74% 6.74% 0

24/07/2015 16/07/2015 Change bps

Overnight Interbank 3.00% 2.75% 0

BDL 45-day CD 3.57% 3.57% 0

BDL 60-day CD 3.85% 3.85% 0

During the week ending July 9 2015, broad Money M3

increased by LP 111B ($73.96M), to reach LP 181,580B

($120.45B) with a 4.61% yearly growth and a 2.36% y-t-d

uptick. In contrast, M1 decreased by LP 61B ($40.53M) due to

the decrease in demand deposits by LP 190B ($126.03M) and

the increase in money in circulation by LP 129B ($85.57M).

Total deposits (excluding demand deposits) went up by LP

173B ($114.49M), over the week, given the LP 247B growth in

term and saving deposits and the $49M contraction in

deposits denominated in foreign currencies. Over the above

mentioned period, the broad money dollarization rate

experienced a down-tick from 58.05% on July 2, to 57.97%

on July 9. According to the Central Bank, the overnight

interbank rate dropped from 3.00% at the end of April 2015 to

2.75% at the end of May 2015.

In the TBs auction held on the 16th of July 2015, the Ministry

of Finance raised LP 166.48B ($110.44M), through the

issuance of bills and notes maturing in 3M, 1Y and 5Y. The

highest demand was achieved on the 5Y notes, with a

79.39% share of total subscriptions, while the 3M and 1Y bills

captured the remaining 10.90% and 9.71%, respectively. The

3M and 1Y bills yielded 4.39% and 5.08%, while the coupon

rate of the 5Y notes stood at 6.74%. New subscriptions

exceeded maturing bills by LP 63.03B ($41.82M).

129

132

135

138

141

144

147

150

153

156

159

162

165

168




S A L

Eurobond Market

Eurobonds Index and Yield

23/07/2015 15/07/2015 Change Year to Date

BLOM Bond Index (BBI)* 107.244 107.078 0.16% 1.10%

Weighted Yield** 5.45% 5.50% -4 43

Weighted Spread*** 378 384 -6 -52

*Base Year 2000 = 100; includes US$ sovereign bonds traded on the OTC market

** The change is in basis points ***Against US Treasuries (in basis points)

Lebanese Government Eurobonds

Maturity - Coupon

23/07/2015

Price*

15/07/2015

Price*

Weekly

Change%

23/07/2015

Yield

15/07/2015

Yield

Weekly

Change bps

2016, Nov - 4.750% 100.85 100.70 0.15% 4.05% 4.19% -13

2017, Mar - 9.000% 107.45 107.5 -0.05% 4.29% 4.32% -3

2017, Oct - 5.000% 101.12 100.75 0.37% 4.46% 4.64% -18

2018, Jun - 5.150% 101.46 101.923 -0.45% 4.60% 4.44% 17

2018, Nov - 5.150% 101.23 100.88 0.35% 4.74% 4.86% -12

2019, Apr - 5.500% 101.75 101.523 0.22% 4.98% 5.05% -7

2020, Mar - 6.375% 104.38 104.25 0.12% 5.29% 5.33% -4

2020, Apr - 5.800% 101.88 101.75 0.13% 5.34% 5.38% -3

2020, Jun - 6.150% 103.13 102.965 0.16% 5.41% 5.45% -4

2021, Apr - 8.250% 113.25 113 0.22% 5.51% 5.57% -6

2022, Oct - 6.100% 102 101.63 0.36% 5.75% 5.82% -6

2023, Jan - 6.000% 101 100.88 0.12% 5.83% 5.85% -2

2024, Dec - 7.000% 106.88 106.5 0.36% 6.03% 6.08% -5

2025, Jun - 6.250% 101 100.75 0.25% 6.06% 6.09% -3

2026, Nov - 6.600% 102.63 102.5 0.13% 6.27% 6.29% -2

2027, Nov - 6.750% 103.63 103.5 0.13% 6.32% 6.34% -2

Mid Prices ; BLOMINVEST bank

Demand for Lebanese Eurobonds showed a minor improvement as the BLOM Bond Index (BBI) ticked up by 0.16%

over the week to 107.24 points. Lebanon’s BBI still managed to outperform the JP Morgan Emerging Markets’ Bond

Index which slightly increased by a weekly 0.02% to settle at 674.85 points.

The yields on the Lebanese Eurobonds maturing in 5Y and 10Y lost 3 basis points (bps) and 2 bps to 5.16% and

6.06%, respectively. In the U.S, the yield on 5Y treasuries added 2 bps to 1.65%, while that of the 10Y dropped 8 bps

to 2.28%. The increase in demand for long term US notes came as a result of low inflation expectations, driven by

falling commodity prices. Accordingly the spread between the yields on the 5Y Lebanese Eurobonds and their US

comparable narrowed by 5 bps to 351 bps, while the spread between yields on 10Y notes widened from 372 bps to

378 bps.

Lebanon 5Y Credit Default Swaps (CDS) steadied at 355-380 bps. 5Y CDS quotes of Saudi Arabia, Turkey and Brazil

widened from 219-222 bps, 55-60 bps, and 260-263 bps to 225-228 bps, 57-62 bps, and 290-293 bps, respectively. As

for Dubai’s 5Y CDS quotes, they narrowed from last week’s 179-188 bps to 175-180 bps.

4.50%

5.00%

5.50%

6.00%


Weighted Effective Yield of Eurobonds



S A L

ECONOMIC AND FINANCIAL NEWS

BDL’s Total Assets by Mid-July ($B)

Source: BDL

BDL’s Total Assets Stood at $91.13B by Mid-July

Lebanon’s Central Bank’s (BdL) revealed a 0.41% monthly growth

by Mid-July in its total assets to $91.13B compared to a lower

amount of $90.76B by June 15.

Foreign assets, which grasped 42.87% of total assets, went down

by 0.24% month-on-month to $39.06B by July 15, 2015. Similarly,

gold (11.69% of total assets) declined by 1.80% from last month to

$10.65B on the back of the 3.09% fall in international gold prices,

over the same period. In contrast, securities’ portfolio (18.03% of

total assets) improved 1.93%, from June 15, to $16.43B by Mid-

July, while loans to the financial sector (5.03% of total assets)

dropped by 0.73% m-o-m to $4.58B.

On the liabilities side, financial sector deposits grew by 0.78% m-o-

m to $72.21B, taking 79.24% of total liabilities in July 15, while

public sector deposits (7.32% of total liabilities) down ticked by

3.13% to $6.67B, over the same period.

2010 2011 2012 2013 2014 2015

57.77

67.55

74.27

77.66

83.19

91.13



S A L

Yearly CPI Components Change in June

Source: CAS

Deflationary Pressures on the Lebanese Economy in

H1 2015

According to the Central Administration of Statistics (CAS), the

consumer price index (CPI) has been prone to deflationary

pressures in H1 2015 compared to H1 2014. The CPI dropped from

100.61 in June 2014 to 97.22 in June of this year, registering a

3.37% year-on-year (y-o-y) drop. Since “water, electricity, gas &

other fuels” and “transportation” constitute two of the major

weights in the CPI with a cumulative share of 25%, it’s expected

that consumer prices will fall on the back of the approximate 45%

yearly decline in the average international oil prices for June 2015.

Furthermore, the appreciating dollar versus the Euro influenced the

price decrease bearing in mind that a major part of Lebanon’s

imports are from Europe. Worth mentioning that overall prices have

also been decreasing year-to-date by 2.09%.

In terms of the CPI’s components, “Food and non -alcoholic

beverages” (20.6% of CPI) decreased by a 1.69% y-o-y in H1 2015.

Moreover, “Transportation” (13.1% of CPI) and “Water, electricity,

gas & other fuels” (11.9% of CPI), experienced yearly falls of 9.26%

and 18.66%, respectively. In addition, other 2 sub-indices that

respectively waned were “Health” (7.8% of CPI) and

“Communication” (4.6% of CPI), recording a 4.80% and 3.51% y-o-y

decline over the same period. The final sub-index that declined was

“Recreation, amusement & culture”, which witnessed an annual

downtick of 0.26% from June 2014 to 100.97 in June 2015.

However, Education sub-index, constituting 4.50% of the CPI,

augmented by 4.52% y-o-y in H1 2015. Furthermore, clothing and

footwear (5.4% of CPI) prices went up by an annual 4.13%. In

addition, actual rent sub-index for households (old and new rent),

with a stake of 3.4% in the CPI, augmented by an annual 9.88%

over the above mentioned period.

-18.66%

-9.26%

-4.80%

-3.51%

-1.69%

-0.26%

9.88%

4.52%

4.13%

Water, electricity, gas & other fuels

Transportation

Health

Communication

Food & non-alcoholic beverages

Recreation,amusement & culture

Actual Rent

Education

Clothing & footwear



S A L

Monthly Number of Construction Permits

Source: Orders of Engineers in Beirut and North

6-Year Low Continued to Characterize Building Permits

in H1

The number of construction permits witnessed a yearly plunge of

15.87% to reach its lowest level in 6 years at 7,387 in H1 2015,

compared to a higher level of 8,780 in 2014. In this context, the

construction area authorized by permits (CAP) registered a 19.43%

year-on-year (y-o-y) drop amounting to 5.92M sqm by June,

compared to 7.34M sqm by June 2014.

Noting that permits are usually issued at least 6 months after

applications are filed, the fall in construction activity is due to the

declining trend in demand that has started in 2011 following the

Arab spring and the Syrian unrest. Coupled with that, construction

permits might have taken a big hit in the past year to reach this

lowly level, as the presidential vacuum is ever prominent.

The average area per transaction dropped by June 2015, from

836.52 sqm/permit in 2014 to 801.09 sqm/permit, bearing in mind

that mainly only large developers are still in the market.

In June alone, the number of permits stood at 1,571, a 0.38% y-o-y

down tick from June 2014’s level. CAP also exposed a 13.88%

yearly plunge to 1.08M sqm from 1.25M sqm recorded in June of

last year. In terms of regions, Mount Lebanon grasped 42.84% of

total permits, while South Lebanon and Nabatiye took respective

shares of 17.12% and 12.48%.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Dec-14

Apr-15

Construction Permits

6-Month Moving Average



S A L

Total Real Estate Transactions by June

Source: Cadastre

Airport Passengers by June (in Millions)

Source: RHIA

Declining Demand Putting a Toll on Total Real Estate

Transaction By June

Total real estate transactions (local and foreign transactions) stood

at 28,722 by June, with a 14.97% yearly drop from 33,780. In

addition, those total transactions were worth $3.59B, declining by

an annual 20.00%, over the same period.

The decline in demand for real estate has been quite prominent

following the Arab Spring in 2010 and the Syrian conflict in 2011, as

the six-month moving average by June 2015 had tumbled by

35.87% from June 2010. In addition, the six month moving average

depicts a seasonal effect as the main drops are experienced in H1

of each year, ensued by a recovery in the second half of the year.

However, this seasonal effect confirms the declining drift in the real

estate with peak points illustrating drops from year to year. The

reason for this fall in demand could be attributed to the pent up

demand that was exhausted during the four years prior to the

Syrian crisis and the implications of the latter mainly on foreign

demand for the Lebanese real estate.

In contrast, figures revealed that foreigners’ share of total real

estate transactions went up annually from 1.51% to 2.33% by June

2015. This progression probably is due to the improving security

situation in Lebanon relative to other countries in the region, which

positively affected tourism.

On another note, average value of real estate transactions went

down by 5.91% y-o-y from $132,748 by May 2014 to $124,905 in

the same period this year.

Airport Passengers Improved by 6.49% by June

Rafic Hariri International Airport (RHIA) activity increased during the

first 6 months of 2015, where the total number of passengers

improved by 6.49% year-on-year (y-o-y) to 3.11M, compared to a

lower number of 2.92M by June 2014.

In details, the number of arrivals went up by a yearly 6.97% to

1.55M by June 2015, as well as departures summing to 1.56M,

rising by an annual 6.03%. This is due to the improving security

situation in Lebanon, coupled with a positive winter season this

year. Moreover, transit travelers augmented by 6.24% to 8,579.

However, taking the month of June alone, the total number of

airport passengers shrank by 2.75% yearly to reach 593,382.

Arrivals decreased by 2.18% to 317,852, and departures also

declined by 4.14% reaching 271,651. In contrast, transit travelers

went up from 1,842 in June 2014 to 3,879 in the same month this

year.

0

1000

2000

3000

4000

5000

6000

7000

8000

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Total Real Estate Transactions

6-Month Moving Average

2.43 2.42

2.76

2.97 2.92

3.11

2010 2011 2012 2013 2014 2015



S A L

CORPORATE DEVELOPMENTS

Chedid Capital Holding Companies

Aim Country

Chedid

Corporate

Dolutions LLP

Provides end-to-end

consultancy services to

entities in the insurance

sector with specific

focus on life and health

insurance Lebanon

SEIB Insurance

and Reinsurance

Company LLC

Provides high quality

insurance products and

services for corporations

and individuals Qatar

Chedid RE

Services a growing

demand for a reliable,

innovative and

professional reinsurance

broker in the MENA

UAE,

Cyprus,

KSA,

Lebanon

Chedid &

Associates

Offers a full range of

General Insurance and

Employee Benefits

products

Qatar,

UAE,

KSA

Source: Company Website

Bank Audi H1 2015 Financial Highlights ($B)

15-Jun 14-Dec % change

Customers

Deposits 36.17 35.82 0.80%

Loans and

Facilities to

Customers

17.03 17.17 -0.79%

Total Assets 42.31 14.96 0.83%

Shareholders’

Equity 3.13 3.35 -6.55%

Net Profit*

($M) 202.09 189.72 6.52%

*From June

2014 to June

2015

Source: Bank Audi

EuroMena Fund Sold its Share in Chedid Capital

Holding

On the 21st of July 2015, the EuroMena Fund announced that it has

withdrawn from regional insurance Chedid Capital Holding (CCH),

the prior month, by selling its share in the company to Saudi Al

Rashed Group’s affiliate company, Rimco. In 2008, the Fund

invested $6M in CCH. The stake was sold at $14.4M, a 2.4 price

multiple.

CCH manages insurance and reinsurance companies in 9 countries

across Europe, the Middle East, and Africa. It has extended its

scope to more than 35 countries over 3 continents. With the

support of the EuroMena Fund, CCH has effectively set up 8

subsidiaries covering international markets including Sub-Saharan

Africa.

The EuroMena Fund Management Team plans to exit, by 2016, the

software development, agro-business, and packaging and paper

production industries, where the team respectively funds ITWorx,

Wadi Holding, and Wataniya.

The EuroMena Fund Management Team has raised above $300M

from major investors and closed more than 20 investments and

divestments.

Bank Audi Consolidated Profits Rose by 6.52% to

$202.09M in H1 2015

Bank Audi group recorded profits of $202.09M in H1 2015, a 6.52%

increase from June 2014, according to their unaudited financial

statements. This mainly came on the back of the respective

increases of 16.53% and 9.34% in net interest income and net fee

and commission income to $456M and $126M, respectively. In its

press release, Bank Audi stated that 48% of its profits were from

entities outside Lebanon.

As for total assets, they grew from the beginning of the year by

0.83% to $42.31B although loans and facilities to customers

dropped by 0.79% year-to-date (y-t-d) to $17.03B, of which 66%

from entities outside Lebanon.

On the liabilities side, customers’ deposits ticked up by 0.80% y-t-d

to $36.17B while total shareholders’ equity registered a y-t-d fall of

6.55% to $3.13B. Worth mentioning, according to the press release,

the Bank’s capital adequacy ratio stood at 12.8% as per Basel III and

primary liquidity to customer’ deposits ratio was at 45.5%. The

Bank’s Return on Average common equity (ROCE) reached 13.8%.



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FOCUS IN BRIEF

International Monetary Fund’s Article IV Consultation for Lebanon – 2015

In July 2015, the International Monetary Fund (IMF) released its Article IV consultation for Lebanon in which it discusses the

current context, highlights challenges and priorities and, issues recommendations for the future. The following lines sum up

the IMF’s views.

Lebanon: Host to a Large Number of Refugees

For the fifth year now, the Syrian conflict is still playing a major part in determining the short -term and long-term outlook in

Lebanon. The spillovers of the Syrian crisis are both substantial and multi-faceted. According to the United Nations High

Commission for Refugees, the number of Syrian refugees surpassed 1.4 million in January 2015 and by adding the already -

registered 0.4 million Palestinians in Lebanon, the total number of refugees would surpass one third of the Lebanese

population.

Multi -D imensional Syrian Spi l lovers

The Syrian spillovers have added pressure on several fronts in Lebanon. The World Bank estimates the direct fiscal impact

of the crisis over the period 2012-2014 at $2.6B and estimates the cost of restoring public-service provision to pre-crisis

levels at $2.5B. The inflow of Syrian refugees not only strained already-weak public finances but also added pressure on the

country’s infrastructure and social fabric. According to the IMF, the Syrian crisis caused the Lebanese poverty rate to rise by

4 percentage points to 32%, led to a 50% growth in the workforce compared to 2011 and widened the income gap as

Syrian refugees accept lower wages than Lebanese workers.

Humanitarian Support for Lebanon: Insufficient and Facing Shortfal ls

$1B of humanitarian assistance1 were disbursed in each of the years 2013 and 2014, substantial but insufficient sums. The

World Food Program’s card voucher hands out a $30 voucher per month for 883,000 refugees and covered 40% of eligible

refugees in 2014 compared to 28% in 2013. However, pressure is rising which led the WFP to temporarily suspend its

program in December 2014 and to now often hand out assistance of less than $20 per month per refugee.

In 2014, the government cooperated with the UNDP in a plan targeting both refugees and vulnerable Lebanese. The project

dubbed the Lebanon Crisis Response Plan (LCRP) is a 2 - year stabilization and development plan that targets 1.5M

refugees and 1.9M vulnerable Lebanese, with one third of the project aimed at addressing Lebanese stabilization and

development needs. Out of the $2.14B for the project, only $400M has been made available.

1

Amount encompasses assistance given directly to refugees as well as to agencies working with refugees



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Humanitarian Contributions for Lebanon, in mil l ions of USD

Source: IMF, UNDP

Lebanon Lacks a Crisis -Response Strategy

So far Lebanon has not established a clear strategy to deal with the heavy influx of Syrian refugees. However, the IMF notes

that the authorities adopted a policy paper in 2014 pledging to “reduce the number of individuals in Lebanon registered as

displaced, to address local security concerns and to share the burden of the crisis by expanding the humanitarian response

to include local communities and infrastructure.”

In line with this policy paper, the number of Syrian refugees steadied in 2014 due, in part to tighter border control. The

registration of new refugees is now down to around 10,000 per month compared to around 30,000 per month prior to

October 2014.

Pol itical Inertia is Crippling Decision Making

Lebanon has been unable to elect a President since May 2014. The Parliament can still legislate in the absence of a

President if a unanimous agreement is reached. However, that agreement is tough to reach amidst the current political

tensions. Even the legitimacy of the Parliament is under scrutiny after its term was extended for the second time to June

2017.

Economic Growth Witnessed a Significant Slump

Lebanon’s GDP growth slumped from 2011 onwards and now falls short of its potential. GDP growth rate fell from a high of

8% in 2010 to less than 1% in 2011 and then eventually inched up to 2% in 2014 and is likely to remain at that level for

2015. Since core sectors of the Lebanese economy such as tourism, real estate and construction, have taken a hard hit and

are unlikely to recover soon. Lebanon’s GDP growth will probably not return to the potential 4% before 2019. Inflation also

declined in 2014 as the prices of oil dropped but the IMF estimates inflation to return to about 3% by 2015.

Exceptional Factors Led to Short -Term Improvements on Several Fronts

Despite the morose economic background, incomes and consumption received a boost from lower oil prices. According to

the IMF, the sensitivity of local fuel prices to global oil prices is relatively high in Lebanon2

and that boosted incomes.

Moreover, remittance inflows which mainly come from Gulf-Cooperation Countries remained and are likely to remain stable

despite the volatility in oil prices, especially since GCC countries have large buffers against low energy prices.

2 After the slump in global oil prices, retail fuel prices in Lebanon declined by about 30% in 2014. Amongst regional peers, Lebanon

showed the largest pass-through from falling oil prices.

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2011 2012 2013 2014



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One off measures also allowed Lebanon to have a better fiscal positioning in 2014. The treasury benefitted from

exceptionally large telecom transfers, the non-implementation of the salary increase for public sector employees, the under

spending on capital projects and the flat social and current spending. These factors allowed for an unexpected primary

surplus representing 2½ % of GDP.

This exceptional, one-off set of circumstances cannot spare Lebanon the effort of fiscal reform. The IMF believes that if

these one-off factors will not be repeated, the primary balance will deteriorate to record a deficit of 1¼ of GDP in 2015 and

the debt burden will remain extremely high by international standards. The combination of slowing growth and the potential

rise in global interest rates will put upward pressure on public debt. Without fiscal adjustment, interest payments will surge

to 12% of GDP or around 40% of total spending and will therefore reduce much-needed spending on social and structural

reforms.

Fiscal Adjustment through Fairer F iscal Pol icies

According to the IMF, Lebanon’s tax capacity remains under-utilized. Efforts to better oversee the collection of VAT refund

claims was commended by the IMF but it believes that more can be done. The Fund called for an increase in the VAT rate

by one percentage point to 11%.

The IMF believes that lower oil prices offer an opportunity for Lebanon to reform its fuel taxation. The IMF recommended

the removal of the VAT exemption on diesel introduced in 2012 and an increase in gasoline excises which were significantly

reduced in 2011. Not only will these measures increase government revenues but they will also promote a more conscious

use of fuel products which would then reduce congestion and pollution.

Currently, gasoline is subject to a 10% VAT tax and to low excises of less than 20 cents per liter. Green and red diesels for

transportation and heating are tax free and have never been subject to excises.

Amongst regional peers, Lebanon showed the largest pass-through from falling oil prices. After the slump in global oil

prices, retail fuel prices in Lebanon declined by about 30% in 2014. However, taxes on these now cheaper fuel products

were not amended and that is a missed opportunity for Lebanon’s treasury.

The low fuel taxes however generate revenues losses and are not fairly beneficial to all categories of the population. The

cost of the VAT exemption on diesel exceeds ½ percent of GDP. As for the subsidy, the poorest 20% of the population only

benefit from 6% while the richest 20% receive 55%.

Minor Positive Steps but No Major Structural Reforms

Unfortunately, no advancement was made on structural reforms. The reforms of the electricity sector and of the Lebanese

pension system have long been delayed. Moreover, Lebanon is also unable to make progress in terms of its oil and gas

wealth as the bidding process for exploration has been constantly postponed and as the Petroleum Tax Law is still awaiting

parliament approval.

On the upside, the IMF commended the Lebanese authorities for several undertaken steps. The first positive step is the

Ministry of Finance’s publication of a quarterly T-bill issuance calendar and of an updated public debt management strategy.

The parliament was also commended for the passing a law allowing for new Eurobonds issuances.

Persistence of the Banking Sector’s Resi l ience

Foreign exchange reserves and financial markets remained resilient. The IMF estimates Lebanon’s current account deficit at

a sizeable 25% of GDP in 2014. A large current account deficit might erode the country’s foreign reserves, which is even

more challenging given the Lebanese pound’s peg to the US dollar. Luckily, foreign inflows are still growing which has

allowed the central bank to stock up on an appropriate level of foreign reserves, which amounted to $38.86B at the end of

June 2015.

The Lebanese banking sector is another source of resilience for Lebanon. The banking sector’s aggregate assets exceed

350% of GDP, allowing it to be one of the largest in the world and in the MENA region in terms of share in GDP. Lebanese

banks pull their strength from a loyal depositor base, residents and non-residents alike. In turn, banks have channeled these



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deposits back into the private sector and into the public sector. The conservative business model, the proper supervision

and the significant buffers are also core pillars for the Lebanese banking sector.

The IMF however highlights that the tight link between the sovereign and the banks is a double-edged sword. Although the

government is able to fund large budget and current account deficits due to Lebanese banks, this also means that a large

part of the macroeconomic stability is dependent on the banks’ ability to act as chief financiers for the government and

therefore attract foreign deposits.

The growth in loans to the non-financial private sector has outpaced the growth in nominal output, but no risk to overall

financial stability has been detected. The ratio of private sector to GDP grew from 86% to 91% over 2013-2014 partly on

account of the central bank’s stimulus packages of $3.4B. As a pre -emptive move, the Central Bank introduced new retail

loans regulation by lowering the loan-to-value ratios and debt-service to income ratios.

Conclusion

Lebanon is facing a challenging regional and local context that needs to be addressed through an appropriate policy mix

and structural reforms. Fiscal sustainability should be restored which would lighten the load placed on the Central Bank. In

fact, the Central Bank’s policy aims to build up foreign reserves to meet many targets since it has to maintain the peg of th e

Lebanese pound to the dollar, establish stimulus packages for the private sector and finance the government’s needs.

Structural reforms also need to be undertaken in order to promote inclusive growth, which is a growth that ensures rapid

and sustained poverty reduction.

The Lebanon Brief

of 16

Your Investment Reference

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Research Department:

Wael Khoury [email protected]

Lana Saadeh [email protected]

Riwa Daou [email protected]

Mirna Chami [email protected]

Marwan Mikhael [email protected]

mailto:[email protected]

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