11

LEBANESE ENTERPRISES DIAGNOSIS:LEBANESE ENTERPRISES DIAGNOSIS:LACK OF FINANCIAL LOANS OR LACK OF LACK OF FINANCIAL LOANS OR LACK OF

FINANCIAL OPPORTUNITIESFINANCIAL OPPORTUNITIES

10 April 200610 April 2006Crown Plaza HotelCrown Plaza HotelBeirut - LebanonBeirut - Lebanon

WORKING MEETING ONWORKING MEETING ONWHICH SOCIO-ECONOMIC PROGRAMWHICH SOCIO-ECONOMIC PROGRAM

FOR LEBANON ?FOR LEBANON ?

byby

Dr Makram SaderDr Makram SaderSecretary GeneralSecretary General

Association of Banks in Association of Banks in LebanonLebanon

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O- Economic BackgroundO- Economic Background

I- Corporate Sector: A DiagnosisI- Corporate Sector: A Diagnosis

1- Credit Supply / Demand Problem?

2- Lebanese Corporate Sector: Demand Side: Earnings & Debt Servicing

II- From Diagnosis to CausesII- From Diagnosis to Causes

III- What to do?III- What to do?

1- Financial Intermediation Level

2- Public Authorities Level

3- Corporate Sector Level

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0- Economic Background

Macroeconomic Imbalances

1-Low economic growth

2-Resources gap (Saving/Investment) :

Current Account Deficit

Public Expenditures Private Spending

Bank Credit

Access to international capital markets

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Table 1- Key Economic IndicatorsTable 1- Key Economic Indicators

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Current Account USD million -2337 -3040 -3483 -3933 -4405 -3219 -2970 -3711 -2783 -2486 -3487 -3756

Current Account / GDP % -25.7 -27.3 -26.8 -25.2 -26.1 -19.1 -17.9 -21.9 -15.1 -12.5 -16.0 -16.9

GDP, constant prices, % % 8.0 6.5 4.0 4.0 2.3 -1.2 1.2 4.2 2.9 5.0 6.0 0.0

GDP, current prices USD million 9110 11119 12997 15595 16854 16877 16593 16947 18379 19895 21768 22203

GDP, deflator Index 464.809 514.079 559.832 632.967 658.553 663.813 644.755 631.976 666.043 686.642 708.771 722.94

Inflation annual percent change % 8.2 10.3 8.9 7.7 4.5 0.2 -0.4 -0.4 1.8 1.3 3.0 2.0

Sources : World Economic Outlook database, IMF, 2005

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I- Corporate Sector: A DiagnosisI- Corporate Sector: A Diagnosis

1-1-Credit Supply / Demand Problem?Credit Supply / Demand Problem?

Not an issue of crowding out or shortage in the supply Not an issue of crowding out or shortage in the supply of creditof credit

Issue of credit demand and lack of good or profitable Issue of credit demand and lack of good or profitable opportunitiesopportunities

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Table 2- Evolution of Commercial Banks’ assets structureTable 2- Evolution of Commercial Banks’ assets structure

End of period 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 (%)

Credit to the private sector 3634 4960 6701 8563 10492 12798 14432 15241 15223 15715 15760 16825 17319 24.63

Credit to the public sector 2346 4195 4980 7771 8667 11898 14488 15437 15301 17630 13934 16023 17709 25.18

Deposits at BDL 810 1651 2168 2759 4001 4245 4431 4731 6972 7823 18671 19690 20376 28.97

Deposits at non resident banks 3860 3509 3647 3772 5322 5642 4705 6883 7368 8239 8053 11058 10475 14.90

Others 343 430 709 1094 1401 1910 2389 2741 2801 3154 3698 4189 4446 6.32

Total 10993 14745 18205 23958 29884 36493 40445 45034 47665 52561 60115 67786 70325 100.00

Million USD

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2000-2005: the growth of credit to the private sector 2000-2005: the growth of credit to the private sector leveled or stabilizedleveled or stabilized

Large liquid assets investedLarge liquid assets invested– Domestically at BDLDomestically at BDL

– Abroad in the form of Foreign AssetsAbroad in the form of Foreign Assets

1993 1997 2000 2005

Private & Public Loans 55 64 68 50

BDL & Foreign banks (Liquid Assets) 42 32 26 44

Fixed Assets 3 4 6 6

Total 100 100 100 100

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Credit to the private sector USD million

02000400060008000

100001200014000160001800020000

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Feb-0

6

Table 3- Credit to the Private SectorTable 3- Credit to the Private Sector

Sources: Bank of Lebanon- Ministry of Finance-Ministry of Economy

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Credit to the private sector USD million 3634 4960 6701 8563 10492 12798 14432 15241 15223 15715 15760 16825 17319

Nominal growth rate of credit (%) 6.8 36.5 35.1 27.8 22.5 22.0 12.8 5.6 -0.1 3.2 0.3 6.8 2.9

Nominal growth rate of GDP (%) 38.1 16.6 17.8 13.3 12.1 6.8 - -1.9 2.3 8.2 6.4 9.2 2.0

Credit to the private sector / GDP (%) 47.4 53.4 59.3 65.1 66.7 75.3 84.8 91.4 89.2 85.1 80.3 78.5 79.2

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Table 4- Lending ratesTable 4- Lending rates

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Average lending rate (%) 12.0 13.0 13.7 13.1 11.8 11.5 10.6 10.7 9.4 7.6 7.4 6.9 8.2

Inflation rate (%) 29.0 8.0 10.6 8.8 7.8 4.0 0.3 -0.4 -0.4 1.8 1.3 3.0 2.0

Real interest rate (%) -17.0 5.0 3.1 4.3 4.0 7.5 10.4 11.1 9.8 5.8 6.1 3.9 6.2

Real GDP growth rate (%) 7.0 8.0 6.5 4.0 4.0 3.0 1.0 0.0 2.0 2.9 5.0 6.0 0.0

1010

2- Lebanese Corporate Sector: Demand side: 2- Lebanese Corporate Sector: Demand side: Earnings and debt servicingEarnings and debt servicing

Bank credit / Bonds & Equities : High debt / equityBank credit / Bonds & Equities : High debt / equity(negative debt leverage)(negative debt leverage) EBITDA / Debt service < 2:EBITDA / Debt service < 2:

– [E] Non performing Loans: Settlements’ efforts[E] Non performing Loans: Settlements’ efforts– [T] Law of tax settlements and installments[T] Law of tax settlements and installments– [D&A] CNSS: Charges on salaries[D&A] CNSS: Charges on salaries

ROIC < WACC (weighted average cost of capital) = cost of ROIC < WACC (weighted average cost of capital) = cost of debtdebt

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Total Loans to private sector Total Loans to private sector Problem Loans (NPL'S)Problem Loans (NPL'S)

Provisions & Unrealised InterestsProvisions & Unrealised Interests

2000 2001 2002 2003 2004 2005 2000-2005

1. Total Loans 24888 25253 24947 24686 28381 28566 2.8%

2. NPL'S 4828 5575 6791 7311 6910 6625 7.1%

3. Provision & Unr. Int 3129 3493 4236 4457 4228 5431 8.1%

4. NPL'S / Total Loans 19.4% 22.0% 27.2% 29.6% 24.3% 23.2%

5. Prov.& U.I./ NPL'S 64.8% 62.7% 62.4% 61.0% 61.2% 68.4%

6. Net Loans 21759 21760 20711 20229 23753 23930 2.0%

7. Unreserved NPL'S 1699 2082 2555 2854 2682 2094 5.8%

8. UR NPL'S / Net Loans 7.8% 9.6% 12.3% 14.1% 11.3% 8.8%

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Problem Loans (NPLs) / Total Loans

- 1998/1999: 12/14%

- 2000-2002: 22-27%

- 2003: 30%

- 2004/2005: 24/23%

(Settlements under BDL circulars)

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II- From Diagnosis to CausesII- From Diagnosis to Causes

Impediments

Input cost &availability of resources

Deep cost /priceDistortions

-REER-Huge inflow of funds

/capital(Dutch disease)

Inadequate Financial

Intermediation

CNSS, EDLPort

Health, EducationTransport

Tax policiesWeak Corporate Governance

DistortedInvestmentStructure

Structural Operating Environment

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Lack of comparative advantages (Inputs/Resources) +Excessive investment in non tradables (real estate, restaurants, hospitals, schools, universities, repairs & maintenance) ↓ - Low productivity: low earning low investment

- Low job creation: low income creation, social subsidies & transfers

- Weak interactivities links -Input/Output Exchange (Leontieff Matrix)

1515

Do these structural imbalances require structural changes/ reforms??

The sustainability of such a structure is costly

(Subsidies, protection, social transfers, debt…)

1616

The structural adjustment requires:The structural adjustment requires:

- Reallocation of resources (capital, human, land, etc…) job creation, exports of goods & services generation

- It’s a time consuming process (10/20/30 years)

- How to manage the transitional period?

Do we need an IMF program??

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III- What to do?III- What to do?

11 – At the Financial Intermediation level– At the Financial Intermediation level Strategic position of the banking sector to initiate the Strategic position of the banking sector to initiate the

reallocation processreallocation process-Modern , well endowment in capital funds, human -Modern , well endowment in capital funds, human resources, management, IT, procedures, local and resources, management, IT, procedures, local and external networks, large deposit base….external networks, large deposit base….-Catalyst, financier, advisor-Catalyst, financier, advisor

Commercial Bank Credit policies to be revisitedCommercial Bank Credit policies to be revisited- From real estate guarantees to cash flow, corporate - From real estate guarantees to cash flow, corporate finance and project finance based credit assessment finance and project finance based credit assessment

and and guaranteesguarantees-Basle II requirements-Basle II requirements

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V- What to do?V- What to do?

11 - Financial Intermediation level- Financial Intermediation level

Determining role of Investment bankingDetermining role of Investment banking

-- Through Special financing schemes: adequate and Through Special financing schemes: adequate and diversified diversified

-- In Corporate financial restructuring In Corporate financial restructuring

Coupled with refinancing structure/fund mechanism???Coupled with refinancing structure/fund mechanism???

This process requires: This process requires: --Large & L.T funds -----Beirut DonorsLarge & L.T funds -----Beirut Donors

ConferenceConference

--Adequate legal frameworkAdequate legal framework

--Well functioning capital marketsWell functioning capital markets

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22 - At the public authorities or government level - At the public authorities or government level

c/o The Way to Beirut Pact (phase I- July 2005)c/o The Way to Beirut Pact (phase I- July 2005)

Promote private sector competitiveness and enhance private Promote private sector competitiveness and enhance private investmentsinvestments

Domestic and external competition– Trade & competition policies (inc. quality issues,

IPP)– Subsidies, public enterprises– Private monopolies

Administrative burden– Corruption, red tape, contract enforcement– Business entry/exit, bankruptcy laws

2020

Costs of utilities (transport, energy, ICT), public infrastructure– Privatization– Public investment planning, sectoral, regional clusters

Access to finance– subsidies– Prudential regulations

Development of capital markets– Establish an independent regulatory authority– Enhance stock market activities– Promote the development of new products– Attract well-seasoned human capital– Attract multinationals to use Lebanon as a platform for their regional expansion

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Legal framework governing private sector activities– labor , commercial , capital markets, investment

park, offshore and bankruptcy laws…

Quality system and accreditation

Incentives to private investments, and in particular

incentives for investments in the less developed regions

Access to information on various sectors of the economy

Start ups and SMEs facilitation and support programs

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Corporate laws Corporate laws and regulationsand regulations

Listing Listing requirementsrequirements

Corporate by –lawsCorporate by –laws

Separation ownership / Separation ownership / ManagementManagement

Protect minority Protect minority interestinterest

International International Accounting, Disclosure, Accounting, Disclosure, Audit, Guidelines and Audit, Guidelines and

StandardsStandards

Dispute Systems and Dispute Systems and bodies.bodies.

3. At the Corporate Sector Level:3. At the Corporate Sector Level:

More Corporate GovernanceMore Corporate Governance