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

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LEBANESE ENTERPRISES DIAGNOSISLACK OF FINANCIAL
LOANS OR LACK OF FINANCIAL OPPORTUNITIES
WORKING MEETING ONWHICH SOCIO-ECONOMIC
PROGRAMFOR LEBANON ?
by Dr Makram Sader Secretary General Association
of Banks in Lebanon

• 10 April 2006
• Crown Plaza Hotel
• Beirut - Lebanon

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O- Economic Background I- Corporate Sector A
Diagnosis 1- Credit Supply / Demand Problem? 2-
Lebanese Corporate Sector Demand Side
Earnings Debt Servicing II- From Diagnosis to
Causes 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 Indicators
Sources World Economic Outlook database, IMF,
2005
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I- Corporate Sector A Diagnosis

• 1-Credit Supply / Demand Problem?
• Not an issue of crowding out or shortage in the
  supply of credit
• Issue of credit demand and lack of good or
  profitable opportunities

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Table 2- Evolution of Commercial Banks assets
structure
Million USD
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• 2000-2005 the growth of credit to the private
  sector leveled or stabilized
• Large liquid assets invested
• Domestically at BDL
• Abroad in the form of Foreign Assets

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Table 3- Credit to the Private Sector
Sources Bank of Lebanon- Ministry of
Finance-Ministry of Economy
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Table 4- Lending rates
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2- Lebanese Corporate Sector Demand side
Earnings and debt servicing

• Bank credit / Bonds Equities High debt /
  equity
• (negative debt leverage)
• EBITDA / Debt service lt 2
• E Non performing Loans Settlements efforts
• T Law of tax settlements and installments
• DA CNSS Charges on salaries
• ROIC lt WACC (weighted average cost of capital)
  cost of debt

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Total Loans to private sector Problem Loans
(NPL'S) Provisions Unrealised Interests
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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 Causes
Structural
Operating Environment
Input cost availability of resources
Inadequate Financial Intermediation
Distorted Investment Structure
Impediments
Deep cost /price Distortions -REER -Huge inflow
of funds /capital (Dutch disease)
CNSS, EDL Port Health, Education Transport Tax
policies
Weak Corporate Governance
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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)
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Do these structural imbalances require
structural changes/ reforms?? The
sustainability of such a structure is
costly (Subsidies, protection, social transfers,
debt)
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The structural adjustment requires -
Reallocation of resources (capital, human, land,
etc) job creation, exports of goods services
generation - Its 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?

• 1 At the Financial Intermediation level
• Strategic position of the banking sector to
  initiate the reallocation process
• -Modern , well endowment in capital funds,
  human resources, management, IT, procedures,
  local and external networks, large deposit
  base.
• -Catalyst, financier, advisor
• Commercial Bank Credit policies to be revisited
• - From real estate guarantees to cash flow,
  corporate finance and project finance based
  credit assessment and guarantees
• -Basle II requirements

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V- What to do?

• 1 - Financial Intermediation level
• Determining role of Investment banking
• - Through Special financing schemes adequate
  and diversified
• - In Corporate financial restructuring
• Coupled with refinancing structure/fund
  mechanism???
• This process requires -Large L.T funds
  -----Beirut Donors
• Conference
• -Adequate legal framework
• -Well functioning capital markets

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• 2 - At the public authorities or government level
• c/o The Way to Beirut Pact (phase I- July 2005)
• Promote private sector competitiveness and
  enhance private investments
• 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

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• 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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3. At the Corporate Sector Level More
Corporate Governance
Corporate laws and regulations Listing requirements Corporate by laws
Separation ownership / Management
Protect minority interest
International Accounting, Disclosure, Audit, Guidelines and Standards
Dispute Systems and bodies.