1 LEBANESE ENTERPRISES DIAGNOSIS: LACK OF FINANCIAL LOANS OR LACK OF FINANCIAL OPPORTUNITIES 10 April 2006 Crown Plaza Hotel Beirut - Lebanon WORKING MEETING ON WHICH SOCIO-ECONOMIC PROGRAM FOR LEBANON ? by Dr Makram Sader Secretary General Association of Banks in Lebanon

2 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

3 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

4 Table 1- Key Economic Indicators Sources : World Economic Outlook database, IMF, 2005

5 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

6 Table 2- Evolution of Commercial Banks’ assets structure Million USD

7  : 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

8 Table 3- Credit to the Private Sector Sources: Bank of Lebanon- Ministry of Finance-Ministry of Economy

9 Table 4- Lending rates

10 2- Lebanese Corporate Sector: Demand side: Earnings and debt servicing  Bank credit / Bonds & Equities : High debt / equity (negative debt leverage)  EBITDA / Debt service < 2: –[E] Non performing Loans: Settlements’ efforts –[T] Law of tax settlements and installments –[D&A] CNSS: Charges on salaries  ROIC < WACC (weighted average cost of capital) = cost of debt

11 Total Loans to private sector Problem Loans (NPL'S) Provisions & Unrealised Interests

12 Problem Loans (NPLs) / Total Loans /1999: 12/14% : 22-27% : 30% /2005: 24/23% (Settlements under BDL circulars)

13 II- From Diagnosis to Causes Impediments Input cost &availability of resources Deep cost /price Distortions -REER -Huge inflow of funds /capital (Dutch disease) Inadequate Financial Intermediation CNSS, EDL Port Health, Education Transport Tax policies Weak Corporate Governance Distorted Investment Structure StructuralOperating Environment

14 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)

15 Do these structural imbalances require structural changes/ reforms?? The sustainability of such a structure is costly (Subsidies, protection, social transfers, debt…)

16 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??

17 III- What to do? 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

18 V- What to do? 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 Conference -Adequate legal framework -Adequate legal framework -Well functioning capital markets -Well functioning capital markets

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

20   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

21   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

22 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. 3. At the Corporate Sector Level: More Corporate Governance More Corporate Governance