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Lebanon: Hobbled by Inaction
LEBANON:
Hobbled by Inaction
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Lebanon’s economy remains drastically weakened against continued deadlock over much needed economic reforms and much uncertainty, and while there is some light at the end of the tunnel, there seems little to prevent it from flickering out
Aseries of holdups by depositors seeking funds frozen in the Lebanese banking system is reminiscent of the broader economic crisis that has sunk the country into one of the world’s worst financial crises since the mid-19th century. Lebanon’s financial system has suffered eyewatering losses over the years and the government estimates overall losses at around $70 billion.
With no clear turning point on the horizon, the Middle East nation’s crippling financial and economic crises are being blamed on the “deliberate inaction” of the country’s politicians, who have been bickering over cabinet posts since May.
The International Monetary Fund (IMF) cautioned in September that Lebanon’s economy remains severely depressed against continued deadlock over much-needed economic reforms and high uncertainty.
The $11 billion that was raised by international donors at the CEDRE Conference in Paris in April 2018 remains locked away and conditional on a series of reforms. The aid was an extraordinary vote of confidence in a country that has made little progress on promised fiscal reforms.
Lebanon agreed with the IMF on a list of 10 reforms to get access to $3 billion to ease its financial meltdown but progress in implementing the reforms agreed upon in April remains very slow. The political turmoil coupled with the influx of Syrian refugees who fled a civil war back home 11 years ago has combined to dry up inflows and aid from several international organisations and countries.
The country has spiralled out of control as the economic and financial meltdown, now in its third year, has sunk the currency by more than 90%, spread poverty, paralysed the financial system and frozen depositors out of their savings.
Meanwhile, the current political landscape is offsetting the hopes of a
comeback anytime soon as Lebanon is likely to be without a government and president by 31 October.
Caught between a rock and a hard place
Lebanon’s unique consensus government—tailored to deal with a diverse population—rests on a powersharing structure whereby the Prime Minister, President and Speaker of the house must come from the country’s three largest religious groups.
By political convention, the President must be a Maronite Christian, the Prime Minister a Sunni Muslim and the Speaker of Parliament a Shiite Muslim. The Parliament must also contain a 50/50 ratio of Muslims and Christians.
The country has been without a fully functioning government since the catastrophic Beirut Port explosion that killed more than 200 people, wounded over 6,500 and ravaged a huge part of the city on 4 August 2020.
The present government has functioned in a limited caretaker capacity under Prime Minister Najib Mikati since May and the premier has until now failed to reach an agreement on a new government with President Michel Aoun.
Political wrangling is stalling the formation of a new government, undermining plans for the much-needed fiscal and structural reforms that would unlock billions of dollars in grants and loans. Lebanon has been scrambling for three years to reform its inefficient and wasteful economy, combat corruption and restructure its ailing banking sector to reach an agreement with the IMF for a bailout program.
Earlier this year, the World Bank accused the country’s political elite of orchestrating a crippling that is threatening the Middle East nation’s long-term stability and social peace. The Washington-based lender said that Lebanon’s nominal GDP plunged by 58.1% from close to $52 billion in 2019 to $21.8 billion in 2021 and is projected to contract by 6.5% in 2022.
The country’s parliament passed the 2022 budget in September using an exchange rate of LBP 15,000 to the dollar. The budget, which was adopted just three months before the end of the year, calculated expenditures at LBP 41 trillion and revenues at LBP 30 trillion—falling short of economic reform measures that would pave the way for an IMF deal.
The IMF urged Lebanese authorities, during an April staff-level meeting to increase revenues to fund the crippled public sector and allow for more social spending by calculating customs taxes at a “unified exchange rate” as part of a list of 10 reforms agreed on by both parties.
– S&P Global
– Kristalina Georgieva, IMF’s Managing Director
Friends in high places
An international donor conference that was co-hosted by France’s President Emmanuel Macron in August 2021 raised $370 million in emergency aid to meet the most urgent needs of the Lebanese people. The country also secured around $280 million from a donor aid conference that was hosted in the wake of the Port Beirut blast.
Lebanon secured $11 billion in aid at the Paris CEDRE Conference in 2018 and the pledges include $10.2 billion in loans and $860 million in grants. However, the donors want to see the government commit to its long-stalled reforms.
Following his appointment as prime minister, Mikati called on the country’s fractious politicians to set aside differences to secure an IMF deal which according to him is the only chance to save Lebanon from financial collapse.
Several international organisations and donor countries stand ready to help the Middle East country but after the formation of an independent government that will implement the much-need structural reforms.
Financial meltdown
For decades, Lebanese banks operated what amounted to a giant pyramid or Ponzi scheme, whereby depositors were paid exorbitant interest rates on simple deposits. The banks in turn lent heavily to the government which racked up
huge debts largely due to corruption and bad governance.
The World Bank in August accused the political elite of being cruel by asserting that deposits in Lebanon’s collapsed banking sector are sacred, noting that “a significant portion of people’s deposits at commercial banks have been misused and misspent over the past 30 years.”
Lebanon’s financial services sector relied on bank deposits—mainly from remittances from millions of Lebanese living abroad—to keep its lenders stable. Banque du Liban (BdL) introduced the so-called financial engineering in 2016 to boost its reserves but instead, the central bank suffered losses of as much as $34.5 billion.
The country’s financial crisis and shortage of foreign currency forced banks to impose strict restrictions on US dollar withdrawals and suspended most transfers abroad which triggered massive protests that began on 17 October 2019.
“We have been engaged with Lebanon for a long time. We very much appreciate the pressure from civil society in Lebanon for a program that is beneficial to the Lebanese people, and this is what we want,” Kristalina Georgieva, the IMF’s Managing Director said in April.
Hit by restrictions on withdrawals, angry depositors have forced their way into more than seven banks since August to access trapped savings as the informal capital controls that were imposed by banks are pushing account holders to take the law into their own hands.
The spate of bank holdups that have snowballed in Lebanon forced banks to close their doors to clients for the second time earlier in October as depositors seek to retrieve funds frozen in the banking system because of the country’s crippling financial crisis. The closure of banks will not only further curtail people’s access to their funds but will likely exacerbate Lebanon’s economic crisis.
Since October 2019, the Lebanese pound has lost more than 90% of its value against the US dollar. Lebanon’s ministry of finance and the central bank said in September that the pound’s official rate, which has been set at LBP 1,507.5 per dollar since 1997, will be fixed at LBP 15,000, a decision that is effective on 1 November.
However, S&P Global cautioned in May 2021 that the cost of restructuring Lebanon’s banking system could range between $23 billion and $102 billion in the event of a currency devaluation adding, “This amounts to 30%-134% of nominal GDP.”
The call by BdL for local lenders to recapitalise last year and repatriate part of deposits transferred overseas forced Bank Audi and Blom Bank to sell their Egyptian portfolios to UAE’s First Abu Dhabi Bank and Bahrain’s Bank ABC, respectively. Meanwhile, Capital Bank acquired 100% of Societe Generale de Banque au Liban’s Jordanian business in February, a year after the lender completed its takeover of Bank Audi’s units in Iraq and Jordan.
THE LEBANESE ECONOMY REMAINS SEVERELY DEPRESSED AGAINST CONTINUED DEADLOCK OVER MUCH NEEDED ECONOMIC REFORMS AND HIGH UNCERTAINTY. DESPITE THE URGENCY FOR ACTION TO ADDRESS LEBANON’S DEEP ECONOMIC AND SOCIAL CRISIS, PROGRESS IN IMPLEMENTING THE REFORMS AGREED UNDER THE APRIL SLA REMAINS VERY SLOW
– The IMF
Light at the end of the tunnel
Lebanon reached a ‘historical agreement’ with Israel demarcating a disputed maritime border and paving the way for the neighbours to ramp up offshore gas production in a gas-rich part of the Mediterranean Sea. France’s TotalEnergies is expected to begin exploring for gas in Lebanese waters as soon as the deal is concluded as the country seeks to strengthen its economy through possible gas wealth.
Lebanese authorities have also started the process of sending Syrian refugees back home with the hope that the decision will ease the country’s economic crisis—where three out of
four people now live in poverty. The World Bank projected that as many as 1.5 million Syrians, about a quarter of the Lebanese population, have taken refuge in Lebanon since March 2011 and the situation has strained the country’s public finances, service delivery and the environment.
The country’s bank standoffs are exposing the desperation of the country’s crippling economic and financial meltdown. The international community has demanded reforms to ease the economic crisis, but entrenched political elites, blamed for decades of corruption and mismanagement, have resisted.
Family Values
Spurred by a growing focus on deployment of assets and transition of wealth, the increasingly important role that family businesses play in regional economies and the changing values of newer generations, family offices are experiencing a greater need for their services
Despite the economic impact of the pandemic and rising interest rates to tame soaring inflation, family office popularity is at an all-time high. Over the years, family offices have adapted and transformed their strategy and operations to address a series of disruptions brought on by global economic, social, regulatory geopolitical and technological changes.
Recent global events, digital disruption and global geopolitical tensions are all driving profound change for global businesses and financial markets. However, for family offices in the Middle East, the current operating environment is creating unique opportunities as their role in global capital flows has grown enormously with much of that activity in the private markets.
“Traditionally focused on balanced, longer-term financial assets, today’s single-family office is a multifaceted operation offering many of the same services as a top-tier private bank or investment firm while remaining a bespoke institution reflecting the to list on local stock markets to help grow their enterprises, decentralise their assets and enable easier succession, creating great opportunities for family offices.
Modern family offices have their origins in the 1800s when the JP Morgan and Rockefeller families established their own family offices in 1838 and 1882, respectively, to cater to their financial as well as asset management needs.
attributes and ambitions of the family it serves,” said Deloitte.
There is a growing demand for top talent among the Middle East’s family offices as the newly professionalised institutions are hunting leaders for their boards and highly skilled investment professionals to manage their balanced portfolios.
A projected 53% of Ultra High Net Worth (UHNW) families in the world have intensified their due diligence processes when considering investments as they seek to avoid greenwashing, measure impact and define their approach. Though many family offices are already playing a key role in helping families transition to more responsible investment, wealthy families in the region are demanding increased focus on environmental, social and governance (ESG) across their portfolios as they translate their commitments into concrete actions.
Family-owned businesses are the engines of growth globally and a driving force behind economic diversification in the GCC region. The UAE and Saudi Arabia have been encouraging family businesses
A global perspective
Over the years, family offices—the organisations that support the purpose, legacy and ambitions of the world’s most wealthy families—have become increasingly active and prominent players in the Middle East and global deals landscape, getting involved in investments across both direct investments and funds.
The pandemic and geopolitical tensions combined with high inflation and soaring interest rates have brought with them unanticipated risks as well as opportunities to improve connectivity, take stock of legacy infrastructure and
ask some fundamental questions. “With inflation high, central bank liquidity flagging and interest rates rising, family offices are reviewing their strategic asset allocation,” UBS said in its latest edition of the Global Family Office Report.
Family offices plan in generations and they are setting their sights on the themes that will remain at the forefront throughout the 2020s including sustainable and impact investing, governance, transparency and surviving an economic downturn.
Like any other sector, family offices are being confronted by the changing market dynamics that are calling for new business models, digitalisation—which is disrupting whole industries with new skillsets—and succession-related issues.
BNP Paribas said that family offices are aware of the need to be able to withstand periodic economic or financial crises and thus they deploy investment strategies based on a longer-term horizon and are more balanced in terms of risks.
Family offices invest directly where they have an edge often as an extension of ultra-high-net-worth individuals (UHNIs) or families’ business interests. As the tailwinds that supported asset prices through the pandemic are fading, family offices are seeking both additional sources of return and alternative diversifiers. UBS said that private equity stands out as an asset class with high expected returns and is the only asset class that has attracted higher allocations year after year.
Ethical investing, which incorporates ESG and conscious investing, is gaining traction among family offices as nextgeneration (NextGen) wealth owners are leveraging their capital to advance social and environmental returns. BlackRock, the world’s biggest asset manager, said sustainable investing is more prominent in EMEA with an average of 22% invested in sustainable strategies, 14% in the US, 7% in Asia and a mere 3% in Latin America.
The focus on sustainable, green and impact investments has significantly intensified, and families are increasingly wishing to hardwire the consideration of sustainable and green investments directly into the structure.
Meanwhile, family offices’ primary diversification concerns relate to traditional asset classes and geographical diversification. To cope with the current operating environment, which is characterized by high-interest rates, inflation and central bank liquidity flagging, family offices are reviewing their strategic asset allocation.
The trend has seen most family offices reducing their fixed-income allocations and sacrificing liquidity for returns as they increase investments in private equity, real estate and private debt. Deloitte said that the appetite to invest over the
next 12-18 months is strong among family offices with opportunities in distressed and digital businesses being among the most sort after.
– BNP Paribas
Family-owned businesses
Family businesses in the Middle East make up a sizeable proportion of the region’s non-oil economy and in these challenging times, the need for adaptability and action to ensure that potential isn’t wasted, and the future is secured has never been as paramount.
The pandemic crisis dramatically shifted the operating environment, creating major challenges and for some, unique opportunities across the entire family offices ecosystem. PwC said that sustainable growth depends on how well these HWNI navigate these treacherous waters and many wealth managers in the Middle East intended to adjust to this new normal.
A survey that was conducted by Deloitte last September also showed that the focus on developing talent within regional family offices while preparing the Next Generation appears to have been effective with a total of 14% believing their NextGen was ready to take the reins now and a further 50% deemed ready within the next five years.
Having said that families which held diverse portfolios and were well prepared in areas such as governance, and cash flow management seemed to
be weathering the economic downturn storm well. The arrival of the pandemic, high interest and inflation have exposed some family businesses to strategic and operational deficiencies.
PwC said that many family office leaders in the Middle East intend to adjust to this next normal while others are taking stock of their business portfolios and operating structures to figure out ways to become leaner and maintain a competitive edge.
Given the sheer size of regional family offices, whose size is reportedly on average double that of their UK and US counterparts, their businesses need to grow by double digits for future generations to maintain the wealth and
the same standard of living, which pose a colossal challenge for them.
Succession planning continues to be a challenge for family offices globally. However, this is particularly problematic in the Middle East where large families are more common and many of these relatively younger businesses face succession issues for the first time.
Proper estate and succession planning is key to Middle East families’ long-term financial security. “Given the outsized economic contribution of familyrun businesses in the Middle East, strong family governance is critical for the region’s continued economic success,” said Lombard Odier.
Wealth managers believe that founders of family offices in Kuwait and Saudi Arabia are more experienced in handling the transition of power, it is evident that they learn from previous mistakes and are doing more to avoid repeating them.
The succession problems have been around for the last five years and are expected to remain a challenge for the next 10 years. However, familyowned businesses and UHNW families are adopting protocols to regulate succession, conflict resolution, business valuations and other key issues to preserve wealth and ensure a smooth transition between generations.
“Wealth managers are recognising the importance of liquidity planning that is attached to a strong succession and estate planning proposition,” Rahul Chopra, Head of Dubai, Senior Executive Officer & Managing Director at Charles Monat Associates at the MEA Finance Wealth Summit. There is a massive generational wealth transfer happening in the Middle East as many families in the region have amassed enormous fortunes over the past 50 years.
An enabling environment
There is a growing trend for UHNW families in the Middle East to turn to family offices to help them manage their wealth effectively. Family offices continue to be a driving force behind growth in the region and Capgemini World Wealth Report 2022 highlighted that the size of the HNWI population in the Middle East grew by 5.5% in 2021 while their wealth expanded by 6.3% with the growth led by Israel and the UAE.
GCC countries are implementing new initiatives to drive economic growth and enhance family offices’ contribution to non-oil GDP as part of their broader strategies to diversify their economies away from heavy reliance on oil revenues.
Family-owned companies in the UAE, Saudi Arabia and Kuwait, are lining up to list stakes on local stock markets to create robust corporate governance structures as the region is experiencing one of its best years for initial public offerings. Speaking at the MEA Finance Wealth Summit, Ismael Hajjar, Partner,
Entrepreneurial Private Business, Family Office Services at PwC Middle East said that one other way to achieve more disclosure or incentivize family businesses is through public listings on local stock markets.
Saudi Arabia’s family-owned companies that have listed last year include Theeb Rent a Car, Alkhorayef Water and Power Technologies and BinDawood Holding Company and Kuwait’s Ali Alghanim and Sons Automotive Company raised $321 million in June. The UAE is also encouraging more family businesses to list shares on the country’s stock markets to enable easier succession.
The Dubai International Financial Centre’s Authority Board approved the opening of a Global Family Business and Private Wealth Centre in August, a move that is set to attract more family offices to the Gulf state. Henley & Partners projected in June that the UAE will lead the world in attracting private wealth to its economy this year as Russian and Ukrainian millionaires seek new homes.
“There’s a high concentration of private wealth in the Middle East as well as large family businesses that are very important to local and regional economies which had created a lot of pent-up demand for more international structures such as trusts and foundations,” Damien Morgan, Senior Wealth Planner, Private Banking at HSBC UAE during the MEA Finance Wealth Summit in September.
The UAE is poised to welcome 4,000 millionaires as Russia and Ukraine are
likely to suffer a net outflow of 15,000 and 2,800 HNWIs, respectively, in 2022.
The changing economic landscape requires adaptability and action to ensure that potential is not wasted and that the future is secured as family-run businesses are an integral part of Middle Eastern economies. While it is often said that each family office is unique, they do share many common attributes in respect to operational practices and service delivery models. Wealthy families, HNWIs and inheritors in the Middle East are setting up or turning to family offices as they face numerous decisions when stewarding assets for future generations and serving the present-day needs of extended family members.
– UBS Group
