the lebanon brief - blominvest bankexchange is likely to preserve its up trend in the coming week,...

S A L

Your Investment Reference

THE LEBANON BRIEF

ISSUE 668 Week of 08 – 13 March, 2010

ECONOMIC RESEARCH DEPARTMENT Rashid Karame Street, Verdun Area P.O.Box 11-1540 Beirut, Lebanon T (01) 747802/12 F (+961) 1 737414 [email protected]

www.blom.com.lb

The Lebanon Brief Table Of Contents of 14

TABLE OF CONTENTS

FINANCIAL MARKETS 3 Equity Market 3 Money & Treasury Bills Markets 5 Eurobond Market 6

ECONOMIC STATISTICS & INDICATORS 7

Total Value of Checks at $4,894M in February 2010 7 Port of Beirut Revenues at $25.67M up to February 2010 7 Airport Passengers Reach 339,237 in February 2010 8 New Vehicles Registration Slipped to 3,542 Up to February 2010 8

ECONOMIC AND FINANCIAL NEWS 9

Total Aid to Lebanon Reached $304M in February 9 Consumer Confidence Boosted in February 9

CORPORATE DEVELOPMENTS 10

IDAL’s One-Stop-Shop Benefits 32 Projects 10 $500M Natour's Development Project 10

FOCUS IN BRIEF 11

The Potential VAT Increase in Perspective 11

This report is published for information purposes only. The information herein has been compiled from, or based upon sources we believe to be reliable, but we do not guarantee or accept responsibility for its completeness or accuracy. This document should not be construed 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.

ISSUE 668; Week of 08 – 13 March, 2010 S A L

The Lebanon Brief Financial Markets of 14

FINANCIAL MARKETS Equity Market

Stock Market

12/03/10 05/03/10 % Change BLOM Stock Index* 1619.26 1570.27 3.12% Avg Traded Volume 196,013 87,201 124.78% Avg Traded Value 2,356,734 2,369,179 -0.53%

* 22 January 1996 = 1000

1000

1300

1600

1900

Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10

Banking Sector

Mkt 12/03/10 05/03/10 % Change

BLOM (GDR) BSE $100.00 $97.00 3.09% BLOM Listed BSE $100.00 $91.00 9.89% BLOM (GDR) LSE $100.00 $97.00 3.09% Audi (GDR) BSE $90.30 $90.00 0.33% Audi Listed BSE $88.10 $86.95 1.32% Audi (GDR) LSE $90.50 $90.00 0.56% Byblos (C) BSE $2.15 $2.07 3.86% Byblos Priority BSE $2.21 $2.11 4.74% Byblos (GDR) LSE $103.00 $103.00 0.00% Bank of Beirut (C) BSE $18.60 $18.60 0.00% BLC (C) BSE $1.50 $1.50 0.00% Fransabank (B) OTC $30.00 $30.00 0.00% BEMO (C) BSE $4.42 $4.30 2.79%

Mkt 12/03/10 05/03/10 % Change Banks’ Preferred Shares Index *

105.88 105.47 0.39%

BLOM Preferred 2004 BSE $101.50 $101.50 0.00% BLOM Preferred 2005 BSE $101.70 $101.70 0.00% BEMO Preferred 2006 BSE $100.00 $100.00 0.00% Audi Pref. D BSE $107.00 $107.00 0.00% Byblos Preferred 08 BSE $105.50 $103.60 1.83% Byblos Preferred 09 BSE $100.10 $100.10 0.00% Bank of Beirut Pref. C BSE $26.90 $26.90 0.00% Bank of Beirut Pref. D BSE $27.00 $27.00 0.00% Bank of Beirut Pref. E BSE $26.90 $26.90 0.00%

* ٢٥ August 2006 = 100

Lebanese equities rallied this week, extending Beirut Stock Exchange (BSE) gains for the second week in a row, tracking global and regional equities up trend, and benefited from the relatively positive political climate in the country. Hence, Lebanon’s main equity gauge, the BLOM Stock Index(BSI), climbed significantly by 3.12% from last week’s close to edge at 1609 points, its highest level since November 2009, stretching its year to date increase to 2.79%. As for the daily average value traded, it slightly fell by 0.53% to $2.35M compared to last week but still well below the daily average value traded in 2009. Compared to its regional peers, the BLOM Stock Index under performed the Morgan Stanley Arab Index (MSCI) that rose 6.21% to 506.7 points. The aforementioned index was boosted by the Kuwait stock market that gained the most, increasing 5.57% driven by Zain. As for Dubai, its index rebounded from last week losses, adding 1.24% on rumors that Dubai World will release today a positive statement regarding its debt restructuring plan. Solidere stocks continued to maintain their up trend path, with Class A & B adding a respective 4% and 2.6% breaking their resistance level of $23 to align at $23.4 on Friday. This was mainly attributed to the recovery of the property stocks in Dubai where the Lebanese real estate developer’s subsidiary unit, Solidere International, has several projects. In London, Solidere GDR followed its domestic counterparts, closing 3.1% higher at $23.1.

HI:1626 Blom Stock Index

LO:1042



Real Estate

Mkt 12/03/10 05/03/10 % Change

Solidere (A) BSE $23.40 $22.50 4.00% Solidere (B) BSE $23.33 $22.74 2.59% Solidere (GDR) LSE $23.10 $22.39 3.17%

In the banking sector, both BLOM listed stock, the best performer this week, and BLOM GDR rose by a respective 9.9% and 3.1% to align at $100. Worth highlighting that BLOM listed hit its all time high level whereas BLOM GDR attained its highest level since end of September 2008. Audi Bank stocks improved also with the bank’s listed stock increasing 1.32% to $88.1 while its GDR inched 0.3% up to close at $90.3. With respect to Byblos Bank, both its common and priority stocks gained, with the former advancing 3.8% to $2.15 and the latter rising 4.74% to $2.21. On the London Stock Exchange, BLOM and Audi GDRs increased by a respective 3% and 0.56% to line up with their local prices at $100 and $90.5.

Manufacturing Sector

Mkt 12/03/10 05/03/10 % Change

HOLCIM Liban BSE $12.50 $12.28 1.79% Ciments Blancs (B) BSE $3.15 $3.15 0.00% Ciments Blancs (N) BSE $0.50 $0.50 0.00%

To conclude, activity on the Beirut Stock Exchange is likely to preserve its up trend in the coming week, as Solidere stocks are expected to increase further after breaking their resistance level of $23.

Funds

Mkt 12/03/10 05/03/10 % Change

Beirut Preferred Fund BSE $102.00 $102.00 0.00% BLOM Cedars Balanced Fund Tranche “A”

----- 6,561.30 6,496.57 1.00%

BLOM Cedars Balanced Fund Tranche “B”

----- 6,010.71 5,951.41 1.00%

Retail Sector

Mkt 12/03/10 05/03/10 % Change RYMCO BSE $3.14 $3.14 0.00% ABC (New) OTC $19.00 $19.00 0.00%

Tourism Sector

Mkt 12/03/10 05/03/10 % Change

Casino Du Liban OTC $435.00 $435.00 0.00% SGHL OTC $6.00 $6.00 0.00%



Foreign Exchange Market Lebanese Forex Market

12/03/10 05/03/10 %Change

Dollar / LP 1501.00 1501.00 0.00% Euro / LP 2074.32 2048.24 1.27% Swiss Franc / LP 1421.37 1400.11 1.52% Yen / LP 16.69 16.89 -1.18% Sterling / LP 2283.41 2266.98 0.72% *Close of GMT 09:00+2

The high interest rate differential of 357 basis points between Lebanese Pound deposits at 6.61% and their US dollar counterparts at 3.04% is putting downward pressure on the dollar that remained oversupplied on the domestic exchange market. Hence, the local exchange rate stabilized towards the lower edge of the trading band at the $/LP1500.25-$/LP1501.75 level with a mid price of $/LP1501. In fine points, the Lebanese Central Bank intervened by purchasing the excess of dollars in order to sustain the pegged exchange rate regime and prevent further appreciation of the LBP. Thus, foreign assets of the Central Bank reached $29.54B by the end of February 2010, at a time when the dollarization rate of deposits at commercial banks dropped to 63.7% by January 2010.

International Forex Market

12/03/10 05/03/10 % Change

Euro / Dollar 1.3760 1.3587 1.27% Sterling / Dollar 1.5147 1.5038 0.72% Dollar / Swiss Franc 1.0560 1.0721 -1.50% Dollar / Yen 89.93 88.87 1.20% NEER Index** 93.67 94.17 -0.53% **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.

The Euro is registering its second weekly rise against the dollar as Greece’s debt crisis is easing and both European and US stock markets are surging, spurring investors to become more risk averse and invest in higher yielding currencies. Moreover, the euro appreciation this week came as investors were relieved following Portugal’s successful $1.3B key bond auction, a week after Greece raised about $6.8B. To note that both countries that have big budget deficits announced plans to cut spending and raise taxes. The euro gained 1.27% to close at $/€1.376, by Friday noon Beirut time from $/€1.3587 last week. Accordingly, the US dollar-pegged Lebanese currency depreciated to LP/€ 2,074.32 from LP/€ 2,048.24 on Friday 12/03/10.

Losses made by the dollar weighed negatively over the Nominal Effective Exchange Rate (NEER) that fell by 0.53% to 93.67 from 94.17 a week earlier. However, the NEER has been appreciating 1.83% since year start.

Money & Treasury Bills Markets Money Market Rates

12/03/10

Treasury Yields

12/03/10 05/03/10 Change bps

3-M TB yield 4.44% 4.44% 0

6-M TB yield 5.50% 5.50% 0

12-M TB yield 5.58% 5.58% 0

24-M TB coupon 6.04% 6.04% 0

36-M TB coupon 6.86% 6.86% 0

60-M TB coupon 7.38% 7.38% 0

05/03/10 Change bps

Overnight Interbank 2.75% 3.00% -25 BDL 45-day CD 4.40% 4.40% 0 BDL 60-day CD 4.89% 4.89% 0

The broad money aggregate (M3), which reflects the total amount of cash and liquid instruments available in the economy, is showing a continuous increase in money supply as interest rates go down. Thus, M3 rose LP472B ($313M) from February 18, 2010 to February 25, 2010 to close at LP125,773B ($83.43B). Total time deposits went up by $149M as savings in Lebanese pound added LP128B ($85M) and foreign currency deposits gained $64M. Demand deposits in LBP registered their largest increase ever of LP270B as it seems that the Lebanese Pound is being used more often as a mean of payment in place of the dollar. Consequently, the dollarization rate of broad money dropped 14bps to 57.63%, extending its year to date drop to 75bps. Given the sustained level of liquidity throughout the year, the Lebanese central bank cut its overnight interbank rate by 25bps last week to 2.75%. To note that the key rate was at 3.5% by the start of 2009.

The ministry of finance announced that it will resume the issuing of treasury bills and notes by the beginning of April 2010. The Lebanese treasury has suspended its TBs issuance as the government’ deposits at the central bank reached $6.68B by the end of February 2010, surging 52% from a year earlier. Moreover, in the money market, the central bank issued 5Y and 7Y semi-annual CDs with a ceiling of LP350B ($233M). 5Y CDs have a coupon of 7.20% whereas 7Y maturities are offered either at a fixed coupon of 7.9% or at a floating rate of BDL overnight rate (2.75%) + a risk premium of (3.75%), which is determined at 6.50% for March, 04, 2010. As a result, 20% of banks’ bids were fulfilled and rounded to the nearest billion.



Eurobond Market Eurobonds Index and Yield

12/03/10 05/03/10 Change Year to Date BLOM Bond Index (BBI)* 112.064 111.797 0.24% 1.83% Weighted Yield** 5.06% 5.00% 6 -43.9 Weighted Spread*** 281 304 -23 -27 *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 12/03/10 Price*

05/03/10 Price*

Weekly Change%

12/03/10 Yield

05/03/10 Yield

Weekly Change bps

2011, May - 7.875% 106.00 106.00 0.00% 2.65% 2.73% -8 2011, Aug - 7.500% 106.00 106.00 0.00% 3.01% 3.07% -6 2012, Mar - 7.500% 107.75 107.75 0.00% 3.47% 3.50% -3 2012, Sep - 7.750% 109.75 109.75 0.00% 3.59% 3.62% -3 2013, Mar - 9.125% 114.00 114.00 0.00% 4.10% 4.12% -2 2013, Jun - 8.625% 113.25 113.25 0.00% 4.23% 4.25% -2 2014, Apr - 7.375% 108.00 108.00 0.00% 5.17% 5.18% -1 2014, May - 9.000% 115.00 115.00 0.00% 4.93% 4.95% -2 2015, Jan - 5.875% 103.00 103.00 0.00% 5.16% 5.17% -1 2015, Aug - 8.500% 115.13 115.13 0.00% 5.24% 5.25% -1 2016, Jan - 8.500% 115.13 115.13 0.00% 5.44% 5.45% -1 2016, May – 11.625% 130.75 130.50 0.19% 5.64% 5.69% -5

2017, Mar - 9.000% 119.10 119.15 -0.04% 5.66% 6.38% -72 2020, Mar - 6.375% 100.75 - - 6.27% - - 2021, Apr - 8.250% 113.38 113.13 0.22% 6.53% 6.56% -3 2024, Dec - 7.000% 102.00 102.00 0.00% 6.78% 6.78% 0

• Mid Prices ; BLOMINVEST bank

Blom Bond Index

9095

100105110115

March-09 May-09 July-09 September-09 November-09 January-10 March-10

The Lebanese Eurobonds market witnessed a strong activity this week following the successful issuance of the 10-year Eurobonds worth $1.2B that was co-managed by BLOM, Fransabank and BNP Paribas coupled with the relatively calm political situation that lifted investor’s confidence in the local market. Consequently, high demand for the new issue led the gains with the BLOM Bond Index (BBI) hitting its all time high level of 112.06 points, rising 0.24 % from last week’s close. As for the portfolio’s weighted yield, it added 6bps to settle at 5.06%, while the spread against the US benchmark retreated by 23bps to 281bps as US treasury yields rose along the curve since investors shifted their interests to equities, seeking for higher gains. On a comparative basis, the BBI outperformed JP Morgan’s EMBI which added 0.7% to close at 483.16

Regarding Lebanon’s credit default swaps (CDS) for 5 years, it improved from last week’s price of 254-262bps to settle at 237-251bps. This measure mirrored investor’s willingness to pay less to hedge against the Lebanese country default as they are more confident about the stability of the political environment and the future of the economy. Regionally, Dubai and Bahrain CDS eased to 462-481bps and 163-182bps respectively, while in emerging markets, CDS is lessened to 154-164bps in Turkey and 116-117bps in Brazil.


The Lebanon Brief Economic Statistics & Indicators of 14

ECONOMIC STATISTICS & INDICATORS Value of Checks up to February ($B)

10.4

8.057.46

5.535.524.88

201020092008200720062005

Source: ABL

Total Value of Checks at $4,894M in February 2010 According to the latest figures released by the Association of Banks in Lebanon, the total value of checks increased by 29% during the first two months of 2010 to $10.4B from $8.05B recorded in the same period last year. As for the total number of checks, it remained stable at 1.9M. The rate of defaults (Value of returned checks/total value) barely changed from 1.8% to 1.9% during this period as returned checks went up by 6% in volume and 32.8% in value to attain 37,396 at $194M. In February alone, check activity registered a year on year rise of around 2.75% in volume to reach 904,056 and 32.7% in value to $4,894M. However, compared to January of this year, it realized a decline of 11.7% in the number of checks and an 11.5% drop in their value, as a result of seasonal effects. In February, the volume and value of checks denominated in foreign currencies preserved their dominance, representing 72.55% and 80.26% of the total respectively.

Port of Beirut Revenues up to February ($M)

13.7615.77

18.94

26.59 25.67

2006 2007 2008 2009 2010

Source: Port of Beirut Authorities

Port of Beirut Revenues at $25.67M up to February 2010 Port of Beirut revenues declined 3.47% during the first two months of 2010, reaching $25.67M versus $26.6M a year ago. This is due to a significant drop of 26.2% in the number of imported cars that reached 13,695 from 18,562 last year. It is expected that car imports will improve in the next couple of months as new models come to the market and ahead of the summer season, i.e. for rental. The drop has more than offset the increase in merchandise that continued its up trend and climbed 3.9% to attain 968,300 tons up to February 2010 compared to 931,900 tons last year. In addition, the number of containers shed by 12.25% to reach 135,035 from 153,912 TEU, due to a sharp decrease of 26.8% in the transshipment activity from 66,490 TEU a year ago to 48,680 TEU. In addition, total number of docked vessels reached 344 up to February, dropping 9.5% from 380 vessels recorded during the same period in 2009. Worth highlighting that in February alone, Port of Beirut revenues grew 4.18% to $13M compared to $12.5M the same month a year earlier .


The Lebanon Brief Economic Statistics & Indicators of 14

Airport Passengers up to February

442,473491,123

583,350

704,925

2007 2008 2009 2010

Source: Beirut Hariri International Airport

Airport Passengers Reach 339,237 in February 2010 The total number of airport passengers increased a yearly 22.5% in February 2010 to hit 339,237, according to statistics published by Rafic Hariri International Airport. This healthy growth resulted from the stable security and political environment in the past two years, which helped Lebanon gain back its stand as an important tourist destination. Total arrivals reached 167,477and departures attained 169,202, while 2,558 passengers, or 0.75% of the total, were in transit. In terms of airline traffic, MEA topped the list as 1,312 planes of the national carrier landed and took off at the airport with 118,604 passengers on board, accounting 35% of total passengers in February. With respect to the country of origin of flights, UAE topped the list of incomers last month with a share of 22% or 75,032 passengers from the total. Saudi Arabia and Kuwait were ranked 2nd and 3rd accounting for 50,090 and 32,275 or 15% and 10% respectively.

New Cars Registration up to February

3542

4028

3575

20262432

20102009200820072006

Source: Association of car importers in Lebanon

New Vehicles Registration Slipped to 3,542 Up to February 2010 According to the association of car importers in Lebanon, new cars registration dropped 12% to 3,542 in the first two months of 2010 as compared to 4,028 recorded in the same period last year. This was partly due to the shortage in new models released by some brands this year. Consequently, the number of new cars sold by Peugeot and BMW slipped by 57% on average .Moreover, although Japanese makes continue to have the lion’s share, their year to date sales registered 1,341 vehicles, down by 29.38% from last year. In details, Toyota’s sales fell by 58.31% following the company’s recall of millions of cars internationally whereas Mitsubishi vending power improved by 265.31% since it was sold to a competitor in the second half of 2009, which apparently adopted an aggressive marketing strategy. Conversely, Korean makes cars are gaining market shares and increased sales by 43.14% to 929 vehicles almost catching up with European makes. The latter came in the second place however losing market share by selling 930 cars in the first two months, 21% less than last year. Nonetheless, Mercedes sales soared to 137 cars up to February 2010 compared to 100 cars in the same period last year as a result of the variety of new models that targeted many market segments. Furthermore, with respect to the share of distributors in Lebanon, Rasamny Younis Motor lost 300 basis points in market share, although they preserved their first place with 16.72% of the total market share, closely followed by NATCO SAL that advanced one place to settle at 15.87%. BUMC came third recording 10.03% of total market share. As for the month of February alone, total vehicles sales reached 1,745 with a year on year decrease of 13.83%.


The Lebanon Brief Economic & Financial News of 14

ECONOMIC AND FINANCIAL NEWS Aid Provided to Lebanon in February 2010

Source: Ministry of Finance

Provider Amount ($M) Project

Italy 0.6 Capacity Building in Public Procurement

KFAED 18 Water Dam in Falougha

USAID 0.6 Technical Support for

Elections

World Bank 70 UTDP

Islamic 215 Infrastructure

Total Aid to Lebanon Reached $304M in February

Lebanon received a total of $304M of grants and loans in February, according to the Aid coordination newsletter published by the ministry of finance. In details, the Embassy of Italy, through the Italian Development Cooperation Office in Lebanon, approved a grant of Euro 452,000 to the MoF for a twelve months program aiming at upgrading the skills of civil servants to better manage, at the operational level, the public procurement function. In addition, the Kuwait Fund for Arab Economic Development (KFAED) announced that it would provide a loan of $18 million to finance the construction of a water dam and reservoir in the Falougha area in Mount Lebanon while the United States Agency for International Development (USAID) and the Ministry of Interior and Municipalities signed a Memorandum of Understanding for a $600,000 grant to support Lebanon’s municipal elections. The project aims at training employees and assisting the Ministry in developing a public media outreach program on the election process. Finally, Parliament approved two development loans: a $70M loan from the World Bank as additional financing for the Urban Transport Development Project (UTDP); and a $215M framework agreement with the Islamic Development Bank for projects in various sectors, including water and wastewater, infrastructure, health, schools, rehabilitation of roads and contingencies.

Consumer Confidence Index Performance

0

50

100

150

200

250

Oct-06

Feb-07

Jun-07

Oct-07

Feb-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Source: Ara’a Research & Consultancy Company

Consumer Confidence Boosted in February The Lebanese Consumer Confidence index (CCI), published by Ara’a Research and Consultancy company, improved significantly in February 2010 compared to the same month a year earlier, adding 42% to settle at 192 points. This came as the aforementioned index fell drastically last February following security incidents that raised fears among citizens. On a monthly basis, the index rose 4% from the month of January as four out of its five sub-indices advanced, with Mount Lebanon leading the gain adding 21 points to 221. With respect to the current economic index, it increased 14% to reach 600 points as consumers became more confident about the local economy, especially that tourists continue to flow in large numbers . As for the security index, it retreated by 5% to 456 points negatively affected by the adverse diplomatic regional tensions. However, Lebanese remain positive on the local economy for the coming six months and are willing to spend more on durable goods, induced by the low interest rates offered by banks on car and housing loans. Thus, both the expected economic and durable goods consumption indices added a respective 4% and 40% to 150 and 210 points.


The Lebanon Brief Corporate Developments of 14

CORPORATE DEVELOPMENTS IDAL’s OSS Projects

Source: IDAL

Sector Number of

Projects Amount($M)

Tourism Sector 13 940

Industrial Sector 6 98

Technology Sector 6 16

Food Industry 3 15

Agricultural Sector 2 9

IT and Telecom 2 7.5

Total 32 1,086

IDAL’s One-Stop-Shop Benefits 32 Projects Thirty-two projects benefited from the one-stop-shop (OSS) services of the Investment development Authority of Lebanon (IDAL) since its launch in 2003 and till the end of 2009, the president of IDAL, Nabil Itani, said during a workshop organized by the Organization for Economic Cooperation and Development (OECD). The total value of these projects reached $ 1.1 billion. Moreover, seven new applications were submitted to the Authority during the first two months of 2010, Itani added. In details, the tourism sector secured the lion’s share with 13 projects valued at $ 940 million. The industrial sector ranked second with 6 projects and a value of $ 98 million, followed by technology (6 projects, for $ 16 million), food industry (3 projects, for $ 15 million), agriculture ($ 9 million) and IT and telecom ($ 7.5 million). The OSS aims at encouraging and facilitating investments in Lebanon by eliminating bureaucratic obstacles and bypassing lengthy administrative procedures. This service provides investors with a single point of contact to deal with the Lebanese authorities and obtain required permits and licenses.

Malia Holding Board of Directors

Name Title

Jacques Jean Sarraf Chairman, Malia Holding

Dikran Ghazal Vice President-Bus Dev. Malia Holding

Carol Abi Karam GM,Pharmaline

Roger Tabet GM,Malia Development

Georges Abou Haidar GM,Cosmaline

Haitham Khayat GM,Malitab

Joanne Chehab GM,Ch.Sarraf & Co

Nicole Sarraf Vice President, Fashion & Luxury

Jennifer Sarraf GM,Maliatec

Ibrahim Fayad GM,Malia C.T.L

Ghazi Jean Sarraf Vice Chairman, Production & Research Dev.

Chakib Chehab President, Malia International Source: Company Data

$500M Natour's Development Project Malia holding announced the re-launch of the Natour project that needs $500M to be realized, covers 485,000 square meters area which is located near Anfeh, south of Tripoli. This project consists of two hotels, residential villas, shopping mall and other leisure facilities as swimming pools and spa. It also includes 450 meters of seashore and an old Cistercian monastery. The project design must be finalized in June according to the project developer. Afterwards it requires three to four years to be accomplished. Worth highlighting that this real estate project started in 2004 but has been put on hold due to political instabilities and planning difficulties.


The Lebanon Brief Focus In Brief of 14

FOCUS IN BRIEF

The Potential VAT Increase in Perspective VAT Revenues in Lebanon ($B)

0.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.0

2002 2003 2004 2005 2006 2007 2008 200915%16%17%18%19%20%21%22%23%24%25%

VAT revenues ($ B) As a percentage of total income

Source: ministry of Finance

On January 10th 2007, before the representatives of international organisms and donor countries who participated in the Paris III conference, the Lebanese government committed itself to conducting a series of structural reforms, so as to curb the growing debt and tackle the deep fiscal deficit of the country. Among other measures, Lebanon pledged to increase the Value Added Tax (VAT) from 10 % currently to 12 % as of 2008 and to 15 % as of 2009.

Yet, due to the politico-security instability of the country during the last few years and to the absence of a unanimous political will to conduct reforms, progress in the Paris III process “remains limited”, as highlighted by the International Monetary Fund (IMF) in its latest program note on Lebanon. Thus, just like many other reforms, increases of the VAT rate were a dead-letter, since the government was not able nor willing to conduct them.

With the revival of State institutions following the formation of the current national unity government, the issue of reforms is again on the table. In fact, the 2010 budget proposal that is currently being finalized by the Ministry of Finance before being submitted to the Council of ministers is expected to stipulate some reforms, like for instance the increase of the VAT rate to 12 %, according to official sources. However, the prospective raise of the Value Added Tax rate sparked-off a virulent debate about the efficiency of this measure and its impact on purchasing power of consumers and poverty.

First, it is indubitable that since its introduction in February 2009, this indirect consumption tax has become one of the major sources of revenue for the Lebanese government. Its revenues have been steadily increasing to reach $ 1.92 billion in 2009, more than 32 % of tax revenues and 22.74 % of total revenues. In comparison, in France, VAT generates some $ 130 billion per year or around 50 % of total revenues.

Thus, it seems that VAT succeeded in reaching its objective, that is to help reducing the public deficit and containing the public debt levels, without hindering growth or jeopardizing monetary and financial stability. It also more than compensated the fall of customs revenues in 2004, 2005 and 2006, following the reduction of tariffs with the application of Lebanon’s regional and international trade obligations.

Consequently, it appears that an increase in VAT rate could be an efficient solution to enhance public revenues and partially fill in the public deficit. In fact, according to official sources, an increase of the VAT rate by two points is expected to generate more than LBP 700 billion in extra revenues in 2010.


The Lebanon Brief Focus In Brief of 14

A raise of VAT also seems to be even more advisable that the levy mechanism of this tax proved to be efficient against tax avoidance. In fact, fiscal fraud is rife in Lebanon and the country’s underground economy is estimated to represent more than 35 % of Gross Domestic Product (GDP). The fact that VAT is collected on the level of business units and paid by end-consumers, with no need for audit and close surveillance, limits the risks of avoidance compared to other taxes, like income tax or corporate taxes.

Moreover, a higher VAT rate seems to be compatible with the size of the Lebanese economy. In fact, Lebanon has one of the lowest Value Added Tax rate among similar-sized economies like Jordan (16 %), Morocco (20 %), Cyprus (15 %), Albania (20 %), Guatemala (12 %), Lithuania (21 %), Uruguay (22 %) and Uzbekistan (20 %).

Nevertheless, opponents to VAT raise fear that this measure could increase dramatically poverty rates in Lebanon. A study conducted by two local economists, Jad Chaabane and Nisrine Salti, under the aegis of the Ministry of Social Affairs and the United Nations Development Program (UNDP) showed that a two-point increase of the VAT rate to 12 % would propel the percentage of households living under the poverty threshold (4 dollars per day) to 35 %, compared to 28 % currently. The study based on an “Almost Ideal Demand System” model also highlighted that a VAT raise would increase the percentage of households living under the extreme poverty threshold (2.4 dollars per day) to 10 % from 8 % currently. If the VAT rate is set at 15 %, the percentage of poor households is expected to reach 47 %, the two economists added.

This study also warned that the adverse consequences of a VAT increase will affect more lower middle-class households living just above the poverty line than those who live under this threshold. In fact, numerous first-necessity goods (poultry, meat, raw vegetables and fruits, bread, flour, milk, rice, sugar, salt, oil, baby food, pasta, butane gas and pharmaceutical products) which constitute the main bulk of the consumption of poor households are exempted from VAT.

Due to this progressive aspect of VAT, an increase of the tax is also expected to affect mainly the consumption of rich households. According to the study, following a VAT raise, the consumption of wealthy households is expected to drop by 19 % compared to 11 % for underprivileged households.

Nevertheless, VAT has a severe regressive aspect that appears through exemptions granted to many luxury goods and services only consumed by privileged households, like precious and semi-precious stones and metals, pearls, diamonds, gold silver, yachts, sailboats, air transportation services, etc.

In consequence, reducing the regressive aspect of VAT seems to be necessary before any prospective raise of its rate, so as to minimize the impact of such a decision on underprivileged households. This goal can be achieved by reconsidering the exemption list and by applying a differentiated VAT rate, according to the degree of necessity of the product.

Moreover, a VAT raise will not be efficient enough if considered alone and isolated from other reform measures stipulated in the Paris III program. In parallel with the increase of the VAT rate, the government should launch the process of privatization of mobile phone operators, start restructuring EDL, accelerate the adoption of the law bill on the reform of income tax procedures, apply its decision to create a debt management directorate within the Ministry of Finance and modernize its social services. In fact, resorting solely to fiscal tools to streamline public finances could depress consumption, investment and growth in the medium term, generate a degradation of living conditions, and aggravate the debt crisis instead of solving it.

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