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

1. WORKING MEETING ONWHICH SOCIO-ECONOMIC PROGRAMFOR LEBANON ? LEBANESE ENTERPRISES DIAGNOSIS:LACK OF FINANCIAL LOANS OR LACK OF FINANCIAL OPPORTUNITIES 10 April 2006 Crown Plaza Hotel Beirut - 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. 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

8. 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 - 1998/1999: 12/14% - 2000-2002: 22-27% - 2003: 30% - 2004/2005: 24/23% (Settlements under BDL circulars)

13. 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

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? 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? 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

19. 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

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