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Your Investment Reference
THE
LEBANON BRIEF
ISSUE 909
Week of 02-07 March, 2015
ECONOMIC RESEARCH DEPARTMENT
BLOMINVEST Bank Headquarters
Bab Idriss, Beirut, Lebanon
T (01) 991 784/2 F (+961) 1 991 732
www.blom.com.lb
S A L
ISSUE 909; Week of 02-07 March 2015
S A L
TABLE OF CONTENTS
FINANCIAL MARKETS 3
Equity Market 3
Foreign Exchange Market 5
Money & Treasury Bills Markets 5
Eurobond Market 6
ECONOMIC AND FINANCIAL NEWS 7
Purchasing Managers’ Index (PMI) Down to 48.7 points in February 2015 7
Cleared Checks Declined by 5.52% to %5.82B in January 8
BDL’s Total Assets Increased by a Monthly 1.24% to $88.21B in February 8
Gross Public Debt Records a Limited Increase of 4.8% y-o-y in 2014 9
Value of Industrial Exports Down to $3.15B in 2014 9
CORPORATE DEVELOPMENTS 10
Standard Chartered Bank to Become”Cedrus Invest” 10
FOCUS IN BRIEF 11
Lebanon Drilling into the Benefits of Falling Oil Prices 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.
The Lebanon Brief Page 3 of 17
1150
1200
1250
Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
FINANCIAL MARKETS
Equity Market
Stock Market
06/03/2015 27/02/2015 % Change
BLOM Stock Index* 1,220.22 1,213.42 0.56%
Average Traded Volume 54,071 45,483 18.88%
Average Traded Value 336,298 461,129 -27.07%
*22 January 1996 = 1000
For the second week in a row, the Beirut Stock
Exchange (BSE) registered a gain, albeit small,
possibly feeding on the positive vibes from last
week’s political dialogues between Lebanon’s
different parties. Accordingly, the BLOM Stock
Index (BSI) posted a weekly uptick of 0.56% to
1,220.22 points, widening its year-to-date gain to
4.3%. Thus, market capitalization broadened by
$57.27M to $10.27B. As for the average traded
volume it increased by a weekly 18.88% but
remained low at 54,071 shares, while the average
traded value lost 27.07% from last week to reach
$336,298.
On a comparative scale, the BSI outperformed the
Morgan Stanley Emerging Markets Index (MSCI) and
the S&P AFE 40 Index that posted respective weekly
losses of 1.94% and 0.70%. The Lebanese gauge
also outpaced the S&P Pan Arab Composite Large-
Mid-Cap Index that rose by 0.36% from last week’s
level.
Stepping into the Arab bourses, Egypt bourse was
the week’s best performer recording a 2.59%
progress on gains in the real estate sector and
following the approval of the long-awaited
investment law that reduces bureaucracy and
makes transactions less exposed to legal disputes
and changes in governments. Saudi Arabia’s stock
market came second and hit a 3 month-high
following a weekly rise of 2.18%, partly on
improving oil prices. The BSE stood at the third rank
and was the last stock exchange to post positive
results by the end of this week.
In contrast, the worst performing Arab stock
markets were mostly in the GCC with Dubai, Qatar
and Abu Dhabi recording respective weekly declines
of 3.03%, 2.46% and 2.11%.
Back to Lebanon, activity was equally split between
the real estate and banking. The former accounted
for 50.22% of overall traded value while the banking
sector contributed for the remaining 49.78%.
Solidere shares ended the week on a positive note.
Solidere “A” and “B” shares gained weekly 1.60%
and 1.88% to $11.44 and $11.36, respectively.
Banking Sector
Mkt 06/03/2015 27/02/2015
% Change
BLOM (GDR) BSE $10.00 $9.86 1.42%
BLOM Listed BSE $9.15 $9.10 0.55%
BLOM (GDR) LSE $10.00 $9.84 1.63%
Audi (GDR) BSE $7.22 $7.25 -0.41%
Audi Listed BSE $6.75 $6.75 0.00%
Audi (GDR) LSE $7.00 $7.25 -3.45%
Byblos (C) BSE $1.70 $1.68 1.19%
Byblos (GDR) LSE $76.50 $76.50 0.00%
Bank of Beirut (C) BSE $18.40 $18.40 0.00%
BLC (C) BSE $1.70 $1.70 0.00%
Fransabank (B) OTC $22.00 $22.00 0.00%
BEMO (C) BSE $1.79 $1.79 0.00%
Mkt 06/03/2015 27/02/2015 % Change
Banks’ Preferred
Shares Index *
106.20 106.17 0.03%
Audi Pref. E BSE $102.20 $102.20 0.00%
Audi Pref. F BSE $103.00 $103.00 0.00%
Audi Pref. G BSE $103.00 $103.00 0.00%
Audi Pref. H BSE $103.00 $103.00 0.00%
Byblos Preferred 08 BSE $102.20 $102.00 0.20%
Byblos Preferred 09 BSE $102.20 $102.20 0.00%
Bank of Beirut Pref. E BSE $26.25 $26.25 0.00%
Bank of Beirut Pref. I BSE $26.00 $26.00 0.00%
Bank of Beirut Pref. H BSE $26.25 $26.25 0.00%
BLOM Preferred 2011 BSE $10.20 $10.20 0.00%
* 25 August 2006 = 100
BLOM Stock Index HI: 1234.30
LO: 1159.48
The Lebanon Brief Page 4 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
Real Estate
Mkt 06/03/2015 27/02/2015 % Change
Solidere (A) BSE $11.44 $11.26 1.60%
Solidere (B) BSE $11.36 $11.15 1.88%
Solidere (GDR) LSE $11.20 $11.25 -0.44%
In the banking sector, BLOM listed shares and
Global Depository Receipts (GDR) gained 0.55%
and 1.42% to end the week at $9.15 and $10.00,
respectively. Byblos listed shares also improved
by a weekly 1.19% to $1.70 while Audi GDRs lost
0.41% to $7.22.
Manufacturing Sector
Mkt 06/03/2015 27/02/2015 % Change
HOLCIM Liban BSE $15.00 $15.00 0.00%
Ciments Blancs (B) BSE $3.50 $3.50 0.00%
Ciments Blancs (N) BSE $2.75 $2.75 0.00%
As for the BLOM Preferred Shares Index (BPSI), it
inched up by 0.03% to reach 106.20 points, up
from last week’s level of 106.17 points. The index
was boosted by the weekly positive performance
of Byblos Preferred 2008 shares that added
0.20% to $102.20.
On the London Stock Exchange (LSE), BLOM
GDRs gained a weekly 1.63% to close at $10.00,
while those of Bank Audi and Solidere lost 3.45%
and 0.44% to respective closing prices of $7.00
and $11.20.
Funds
Mkt 06/03/2015 27/02/2015 % Change
BLOM Cedars Balanced
Fund Tranche “A” -----
$7,419.53 $7,409.88 0.13%
BLOM Cedars Balanced
Fund Tranche “B”
----- $5,306.56 $5,299.66 0.13%
BLOM Cedars Balanced
Fund Tranche “C”
----- $5,635.18 $5,627.86 0.13%
BLOM Bond Fund ----- $9,505.47 $9,531.87 -0.28%
The continuing political talks and the relatively
stable security situation of the country could
support the Lebanese bourse’s trading activity in
the coming period.
Retail Sector
Mkt 06/03/2015 27/02/2015 % Change
RYMCO BSE $3.23 $3.23 0.00%
ABC (New) OTC $27.00 $27.00 0.00%
Tourism Sector
Mkt 06/03/2015 27/02/2015 % Change
Casino Du Liban OTC $330.00 $300.00 10.00%
SGHL OTC $7.00 $7.00 0.00%
The Lebanon Brief Page 5 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
Foreign Exchange Market
Lebanese Forex Market
06/03/2015 27/02/2015 %Change
Dollar / LP 1,510.00 1,511.00 -0.07%
Euro / LP 1,653.28 1,691.72 -2.27%
Swiss Franc / LP 1,542.99 1,584.34 -2.61%
Yen / LP 12.56 12.62 -0.48%
Sterling / LP 2,291.40 2,320.65 -1.26%
NEER Index** 161.65 159.26 1.50%
*Close of GMT 09:00+2
**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.
Demand for the dollar increased over the week, as reflected by the
Lebanese pound’s peg against the dollar that went from $/LP
1,509-1,513 with a mid-price of $/LP 1,511 to $/LP 1,510-1,514 with
a mid-price of $/LP 1,512 this week. Foreign assets (excluding
gold) at the Central Bank rose by a monthly 2.71% to $38.89B by
end-February. Meanwhile, the dollarization rate of private sector
deposits stood at 65.68% in November 2014 compared to 66.13%
in December 2013.
After falling to an 11.5 year low against the dollar on Thursday, the
Euro/Dollar rate ended the week at €/$1.0967 from €/$1.1222
previously. This was caused from the ECB’s official detailed
stimulus program of 60B Euros a month, starting next week.
Nominal Effective Exchange Rate (NEER)
Even after Janet Yellen’s comments on postponing a rise in
interest rates to the second half of the year, the dollar
strengthened thus pushing gold prices down to $1,198.20/ounce
this week compared to $1,208.30/ounce on Thursday 27th of
February.
By Friday March 27th, 2015, 12:30 pm Beirut time, the dollar-
pegged LP appreciated against the Euro, going from €/LP 1,691.72
the prior week, to €/LP 1,653.28. The Nominal effective exchange
Rate (NEER) gained 1.50% over the week to 161.65 points, with its
year-to-date gain reaching 9.73%.
Money & Treasury Bills Markets
Money Market Rates
Treasury Yields
06/03/2015 27/02/2015 Change bps
3-M TB yield 4.39% 4.39% 0
6-M TB yield 4.87% 4.87% 0
12-M TB yield 5.08% 5.08% 0
24-M TB coupon 5.84% 5.84% 0
36-M TB coupon 6.50% 6.50% 0
60-M TB coupon 6.74% 6.74% 0
27/02/2015 20/02/2015 Change bps
Overnight Interbank 2.75% 2.75% 0
BDL 45-day CD 3.57% 3.57% 0
BDL 60-day CD 3.85% 3.85% 0
During the week ending February 13 2015, broad Money M3
increased by LP 51B ($33.83M), to reach LP 176,357B ($116.99B)
with a 4.98% year-on-year growth. Meanwhile, M1 declined by
LP 117B ($77.61M) due to the decrease in money in circulation
and demand deposits by LP 128B ($84.91M) and LP 11B
($7.30M), respectively.
Total deposits (excluding demand deposits) edged up by LP 168B
($111.44M), given the increase of deposits denominated in
foreign currencies by $68M and term and saving deposits in
domestic currency by LP 65B. Over the above mentioned period,
the broad money dollarization rate experienced an uptick from
58.49% the prior week to 58.53%. According to the Central Bank,
the overnight interbank rate stood at 2.75% at the end of
December 2014.
In the TBs auction held on the 26th of February 2015, the Ministry
of Finance raised LP 193.62B ($127.77M), through the issuance
of bills maturing in 3M, 1Y and 5Y notes. The highest demand
was achieved on the 5Y notes that grasped a share of 77.80% of
total subscription with the 3M and 1Y bills earned the remaining
10.84% and 11.36%, respectively. While the 3M and 1Y bills
yielded at respective levels of 4.39% and 5.08%, the average
coupon rate for 5Y notes stood at 6.74%. New subscriptions
exceeded Maturing T-bills by LP 155.38B ($103.07M).
129
132
135
138
141
144
147
150
153
156
159
162
165
Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
The Lebanon Brief Page 6 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
Eurobond Market
Eurobonds Index and Yield
05/03/2015 26/02/2015 Change Year to Date
BLOM Bond Index (BBI)* 106.846 106.994 -0.14% 0.72%
Weighted Yield** 5.59% 5.36% 23 57
Weighted Spread*** 399 397 2 -31
*Base Year 2000 = 100; includes US$ sovereign bonds traded on the OTC market
** The change is in basis points ***Against US Treasuries (in basis points)
Lebanese Government Eurobonds
Maturity - Coupon
05/03/2015
Price*
26/02/2015
Price*
Weekly
Change%
05/03/2015
Yield
26/02/2015
Yield
Weekly
Change bps
2016, Apr - 4.500% 100.445 100.37 0.07% 4.09% 4.16% -8
2016, Nov - 4.750% 100.888 100.945 -0.06% 4.19% 4.16% 3
2017, Mar - 9.000% 107.898 108.069 -0.16% 4.89% 4.85% 4
2017, Oct - 5.000% 100.326 100.398 -0.07% 4.86% 4.83% 3
2018, Jun - 5.150% 100.608 100.607 0.00% 4.94% 4.95% 0
2018, Nov - 5.150% 99.994 100.036 -0.04% 5.15% 5.14% 1
2019, Apr - 5.500% 100.428 100.345 0.08% 5.38% 5.40% -2
2020, Mar - 6.375% 103.467 103.559 -0.09% 5.57% 5.55% 2
2020, Apr - 5.800% 100.669 100.75 -0.08% 5.39% 5.37% 2
2020, Jun - 6.150% 102.014 101.964 0.05% 5.28% 5.29% -1
2021, Apr - 8.250% 112.467 112.351 0.10% 5.79% 5.82% -3
2022, Oct - 6.100% 101.483 101.439 0.04% 5.85% 5.86% -1
2023, Jan - 6.000% 100.53 100.506 0.02% 5.91% 5.92% 0
2024, Dec - 7.000% 106.221 106.248 -0.03% 6.14% 6.14% 0
2025, Jun - 6.250% 100.681 100.725 -0.04% 6.16% 6.15% 1
2026, Nov - 6.600% 102.705 102.898 -0.19% 6.27% 6.25% 2
2027, Nov - 6.750% 103.75 103.867 -0.11% 6.32% 6.30% 1
Mid Prices ; BLOMINVEST bank
After the issuance of new Eurobonds maturing in 2025 and 2030 last week, demand for Eurobonds was quite subdued this
week. Accordingly, the BLOM Bond Index (BBI) slipped by a weekly 0.14% to 106.85 points. The BBI’s year-to-date
performance declined from last week’s 0.86% to 0.72% this week. The BBI outperformed the JP Morgan emerging markets’
bond index, which posted a 0.17% weekly decline to 671.58 points. However, demand on the 5Y and 10Y Lebanese
Eurobonds witnessed a small uptick leading by the 5Y and 10Y yields to decrease from 5.27% and 6.18% to 5.26% and
6.10% this week, respectively.
In the US, strong economic fundamentals are pushing investors away from safe-investments such as US Treasuries. In fact,
yields on 5Y US notes and 10Y bonds rose from 1.54% and 2.03% to 1.57% and 2.11% this week. Accordingly, the 5Y and
10Y spreads between the yields on Lebanese Eurobonds and their US comparable narrowed from 373 basis points (bps)
and 415 bps to 369 bps and 399 bps.
The Lebanese 5Y Credit Default Swaps (CDS) narrowed from last week’s range of 371-394 bps to 372-392 bps. In regional
economies, 5 year CDS quotes in Saudi Arabia, Dubai and Brazil all narrowed from 71-79 bps, 198-212 bps and 254-258 bps
to 71-76 bps, 190-205 bps and 251-253 bps, respectively. Meanwhile, the 5Y CDS quote in Turkey widened from 189-192
bps last week to 214-217 bps this week.
4.50%
5.00%
5.50%
6.00%
Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15
Weighted Effective Yield of Eurobonds
The Lebanon Brief Page 7 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
ECONOMIC AND FINANCIAL NEWS
BLOM Lebanon PMI Values
Source: Markit, Blominvest Research Department
Purchasing Managers’ Index (PMI) Down to 48.7 points
in February 2015
The headline BLOM Lebanon PMI fell to its lowest level in five
months during February, registering 48.7 from 49.5 in January. That
signalled an accelerated deterioration in business conditions within
Lebanon’s private sector economy. Adjusted for seasonal factors,
the headline PMI has now registered below the neutral 50.0
threshold in each of the past 20 months.
Output and levels of incoming new work both decreased at faster
rates, as the poor security and political scenes negatively affected
operating conditions. February’s survey pointed to a weaker
demand in the domestic market along with a drop in new business
from abroad- the most marked since last August.
“A slight net gain in employment was recorded despite the general
downturn in activity. The combination of increased staffing
numbers and lower intakes of new work contributed to a reduction
in the amount of uncompleted orders at Lebanese firms, the
second in consecutive months.”; the report explained.
Commenting on February’s results, Maya Mantach, Head of
Equities at BLOMINVEST BANK, said:
“Lebanon PMI is indicating an ongoing contraction in the private
sector economy. Lebanese companies are especially struggling
with demand fluctuations, and both local and foreign orders have
deteriorated in February. Confirming these results, Consumer price
Index declined by 3.75% in January reflecting subdued demand. At
the same time, Lebanese Customs figures revealed exports fell by
around 16% in 2014. I believe that at this stage, the improvement
of operating conditions is no longer tied to the stabilization of
security, but also necessitates a comprehensive economic plan,
even more so than a political breakthrough.”
45.5
46.2
48.5
48.0
49.1
47.9
45.5
47.6
48.8
49.5
49.3
49.5
48.7
43.0
44.0
45.0
46.0
47.0
48.0
49.0
50.0
Feb
14
Mar
14
Apr
14
May
14
Jun
14
Jul
14
Aug
14
Sep
14
Oct
14
Nov
14
Dec
14
Jan
15
Feb
15
50.0 = no change on previous month
The Lebanon Brief Page 8 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
Value of Cleared Checks in January (In $M)
Source: Association of Lebanese Banks,ABL
Cleared Checks Declined by 5.52% to %5.82B in
January
In January 2015, the total number of cleared checks slid by 3.63%
y-o-y to reach 1.04M. The value of cleared checks declined by
5.52% $5.82B in January 2015.
The number of checks denominated in Lebanese Pounds edged up
by 1.84% to 335,058 and their value ticked up from $1.48B in
January 2014 to $1.49B in January 2015.
The number of cleared checks denominated in foreign currency slid
by 6% y-o-y to stand at 701,830 in January 2015 and their value also
fell from $4.68B in January 2014 to $4.33B in January 2015.
Accordingly, the dollarization rate of foreign-currency checks (Value
of foreign currency checks as a share of total value) declined from
75.97% in January 2014 to 74.40% in January 2015.
The number and value of returned checks increased going from
21,525 and $125M in January 2014 to 23,547 and $165M in January
2015, respectively. Therefore, the share of returned checks in the
total value of cleared checks rose from 2.03% in January 2014 to
2.83% in January 2015.
BDL’s Total Assets by February (in $B)
Source: Banque du Liban, BDL
BDL’s Total Assets Increased by a Monthly 1.24% to
$88.21B in February
The Central Bank’s (BDL) balance sheet exposed a positive 1.24%
monthly upturn in total assets to $88.21B by end of February 2015.
In terms of the assets’ category on in the balance sheet, foreign
assets, constituting 44.08% of total assets, inched up by 2.71% to
$38.89B while the value of gold reserves (12.61% shares of total
assets) decreased by 4.57% to $11.12B. The decrease in the value
of gold reserves followed the slip in international gold prices from
$1,209.60/ounce to $1208.75/ounce during the month of February.
Gold’s appeal as a safe haven slightly faded as the dollar
appreciated by 0.84% to €/$1.12. Moreover, securities portfolio
(16.77% share of the total asset) augmented by 1.43% to $14.80B
probably from BDL’s subscriptions in the recent Eurobond
issuance. Worth mentioning, loans to financial sector (5.08% share
of total assets) gained 2.92% $4.48B.
In the liabilities section, financial sector deposits down-ticked by
0.71% to $68.26B, contributing to 77.38% of the total liabilities.
Meanwhile, the public sector deposits (9.03% share of total assets)
witnessed a monthly surge of 36.24% monthly to $7.97B.
$5,531
$5,608
$5,909
$5,942
$6,160
$5,821
$5,200
$5,300
$5,400
$5,500
$5,600
$5,700
$5,800
$5,900
$6,000
$6,100
$6,200
$6,300
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
55.26
63.70
73.07
77.25
80.11
88.21
2010 2011 2012 2013 2014 2015
The Lebanon Brief Page 9 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
Local Currency Debt by Type of Holder
Source: Association of Lebanese Banks,ABL
Gross Public Debt Records a Limited Increase of 4.8%
y-o-y in 2014
According to data released by the Association of Lebanese Banks,
Lebanon’s gross public debt registered a 4.8% yearly growth rate to
reach $66.56B in 2014 compared to a double-digit growth rate of
10.1% in 2013. Debt denominated in Lebanese pounds grew by
9.66% y-o-y to $40.96B while debt denominated in foreign currency
slipped by 2.04% to $25.60B in December 2014.
Net public debt, which excludes public sector deposits at
commercial banks and at the Central Bank, reached $57.60B in
December 2014, an 8.25% yearly upturn.
The debt to GDP ratio is estimated to stabilize at 134% in 2014,
similar to 2013, according to the Ministry of Finance.
Evolution of Lebanese Industrial Exports in 2014
Source: Ministry of Industry
Value of Industrial Exports Down to $3.15B in 2014
According to the Ministry of Industry, the value of Lebanese
industrial exports amounted to $3.15B in 2014, down from 2013’s
$3.38B and 2012’s $3.57B. On the other hand, the value of imports
of machinery and industrial equipment reached around $269.1M as
compared to $300.4M in 2014 and $288.1M in 2012.
During the month of December 2014 alone, industrial exports
totaled $260.1M up from $242.1M in December 2013 and $292.2M
in December 2012.
The main exported products in December were “Machinery and
mechanical appliances” with a total value of $57M, the bulk of
which were destined for the Saudi Arabian market which imported
$6.1M worth of Lebanese machinery and electrical appliances.
The second top exported products in December were “Prepared
foodstuffs” with a value of $50.1M. The main destination market
was also Saudi Arabia which imported $7.2M worth of “prepared
foodstuffs”. The third top exported products in December were
“Products of the chemical industries” whose value totaled $40.7M.
The top market destination for this product was Turkey who
imported $9.3M worth of products of the chemical industries.
In December alone, the imports of machinery and industrial
equipment totaled $20.7M, slightly up from $20.3M in December
2013. The top provider of machinery and industrial equipment to
Lebanon was China with an import value of $3.6M, followed by
$3.5M for Italy and $2.6M for Germany.
In December, the imports of machinery designed for the prepared
foodstuffs industry represented the highest value in the total with
$4.7M, mainly originating from Italy. Imports of machinery for the
mineral products industry represented the second highest value in
the total with $1.3M, the bulk of which were imported from
Germany.
32%
51%
17%
Banque du Liban Commercial BanksOthers
3.57 3.38 3.15
288.1
300.4
269.1
0
50
100
150
200
250
300
350
2012 2013 2014
Exports, In $B
Imports, In $M
The Lebanon Brief Page 10 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
CORPORATE DEVELOPMENTS
Cedrus Invest Financial Highlights, in millions of
USD
2012 2013 %
change
Total Assets 83.9 85.4 1.8
Loans and
Advances to
Customers
6.91 8.23 19.1
Customer’s
Deposits 5.37 4.73 -11.9
Total
Shareholders'
Equity
54.1 57.3 5.9
Capital –
Common
Shares
51.7 51.7 -
Total Profit (In
$M)
2.34 3.20 36.8
Source: Bilan Banques 2014
Standard Chartered Bank to Become”Cedrus Invest”
The Central Bank of Lebanon has approved for Standard Chartered
Bank to change its name to “Cedrus Bank S.A.L” and that as of
02/03/2015.
This modification is a result of Cedrus Invest Bank acquiring
Standard Chartered’ retail portfolio back in June 2014, a deal
estimated to be worth $25 to $27 million.
The Lebanon Brief Page 11 of 17
ISSUE 909; Week of 02-07 March 2015
S A L
FOCUS IN BRIEF
Lebanon Drilling into the Benefits of Falling Oil Prices
Crude oil, one of the world’s most needed commodities, fully earned its title the “Black Gold” due to its non-renewable
nature and its ever prevailing quality of initiating global tribulations. In turn, its practicality is used in almost everything: to
generate heat, drive machinery, and fuel vehicles and airplanes, and its constituents are used to manufacture plastics,
detergents, paints, cements, and medicines, among others.
The recent free fall in oil prices has altered the course of many global economies, leading decision makers to adapt their
economic forecasts and change their tools in handling the arising consequences, positive or negative as they turned out to
be.
Lebanon was bound to receive the waves of this international shock sooner or later. In saying that, this focus report will
assess mainly the impact of declining oil prices on the Lebanese macro level across the major economic sectors, before
taking a closer look at the micro level to examine the effects of this decline on the Lebanese oil importers and distributors.
Before delving in the recent fall of oil prices, an examination of the major oil price spikes and downfalls in the last 5 years,
attests that these fluctuations in prices are originated from major worldwide events affecting supply/demand mechanisms.
The graph below exposes the links between this non-renewable energy prices and the developments affecting its supply.
5 Year Daily Brent Crude Spot Price ($/barrel) Trend and Timeline of Major Events
Source: Thomson Reuters
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60
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100
110
120
130
1) Arab Spring +
Weakened USD
2) Apreciation of USD +
European economic crisis
3) Iran's announcement to end oil sales to
British and French companies + approval
of Greece bailout plan + China's action to
stimulate the economy
4) New finds and drilling techniques in
North America +10% increase in oil
production from OPEC
5) Disruptions in oil production in South
Sudan, Yemen, Syria, and the North Sea
+ Expectations that policymakers in the
US, Europe and China would stimulate
economic growth
6) Economic problems in
China + US Fed stated that it
might end stimulus package
Free Fall in oil Price
in 2014
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Zooming back to the most recent decline in the price of oil that started in the second half of 2014, the unexpected free fall
was no exception to the opposite market dynamics of supply and demand. (Refer to the graph below)
On the demand-side, frail economic activity, higher efficiency, and an increased substitution away from oil to other fuels
decreased the demand for oil causing its price to fall. Moreover, Japan’s decision to restart some of its nuclear reactors also
reduced forward demand for oil as a source of energy.
On the other hand, oil supply has also increased recently. The return of many oil-producing countries to the market, such as
Iraq, Libya, Nigeria, South Sudan, and Venezuela, and the appearance of new major producers in Africa like Angola are the
main reasons behind the surge in the supply of oil. In addition, North America saw a rise in shale oil production after finding
a new technology, fracking, which led to a fall in the cost of a typical project from $70/barrel to $57/barrel.
Daily Brent Crude Spot Price in 2014-Present ($/barrel)
Source: Thomson Reuters
Brent Crude Oil price hovered at an average of $108.96/barrel in the first half of 2014, where increased oil production in U.S
offset outages in the Libyan oil production. ISIS attacks on Iraq threatened the oil market, as Iraq produces 3.3M barrels per
day (bpd), causing the price to reach its highest value during the year at $115.26/barrel, on the 19th of June, 2014. From then
on, price of oil followed a bearish trend, going down 60.06% to close at its 5Y minimum of $46.03/barrel, on the 26th of
January 2015. Oil underwent a correction, after the low price triggered around 400 oil rigs in the U.S to idle. In addition, the
continued conflict in Libya, the largest oil producer in Africa, caused its oil exports to drop.
But why isn’t OPEC limiting the free fall of oil price?
The answer may lie in OPEC’s past experience with petroleum shocks. Back then, when oil prices diverted from their
sustainable levels, OPEC countries, and mostly the cartel’s swing-producer, Saudi Arabia, would change supply to defend
prices.
For instance, in the 1980s, global recession, along with other factors, caused a reduction in demand for oil. Concomitantly,
increased exploration and production outside OPEC caused supply to increase. This in turn led to lower crude prices.
Hence, OPEC attempted to set production quotas low enough to stabilize prices. During most of this period, Saudi Arabia
acted as the swing producer cutting its production in an attempt to stem the free fall in prices. The Saudi Kingdom slashed
its own output from more than 10M bpd in 1980 to less than 2.5M bpd in 1985-1986 in an attempt to prop up prices. Seeing
that other countries (OPEC and non-OPEC) did not restrain supply keeping oil price on its downtrend, Saudi Arabia shifted
its strategy, by increasing production. This pushed oil prices further down, shutting out higher-cost oil producers and paving
the way for a gradual recovery.
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50
60
70
80
90
100
110
120
5Y Minimum
($46.03/barrel)
Highest close in 2014
($115.26lbarrel) after Troubles in
Closing down of
oil rigs in the US
- Cuting-off of
Libyan oil
exports
Increased oil production
in the US offsets
disruptions in production
Sluggish world
economy
lowering demand
for oil during an
increase in
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Today, the Kingdom’s aim is to defend its market share instead of price, and stop unconventional oil production. Many
geopolitical reasons may be behind Saudi Arabia’s decision for not defending oil price by restricting supply, and instead
flooding the market. Saudi Arabia might want to push oil prices down in order to hurt its adversaries, Iran and Iraq, to
squeeze Russia’s ability to fund the Assad Regime in Syria, and/or to combat the Islamic State, as the latter relies heavily on
seized energy assets to support burgeoning population and intensifying war effort. Other countries of course may have
coinciding interests as well.
The outlook for oil prices shows that they are expected to gain some momentum in the coming two years, but to remain
below their previous averages, as supply is expected to continue to exceed demand, however at a slower rate. The U.S
Energy Information Administration (EIA) predicts Brent crude oil prices to average at $58/bbl in 2015 and $75/bbl in 2016, on
the back of accelerating economic growth forecasts raising hopes for improving demand.
The Case for Lebanon
As stated in the beginning, a change in the price of oil has an impact on the whole world: oil exporting countries as well as
importers. Lebanon, an oil-importer, already began to feel the effects of these changes, across all its economic sectors.
On the real sector, both consumers and producers benefit from lower oil prices. Slashing oil prices already led to a yearly
deflation rate of 3.75% in January 2015. “Water, electricity, gas and other fuel” sub-index experienced an annual drop of
18.10%, while “transportation” sub-index was tailing by a 14.07% yearly decline. In fact, as seen in the graph below,
inflation somewhat tracks the trend in oil prices, though with a slight lag. Faced with lower prices, consumers’ real incomes
would be higher, which would bring about a higher propensity to save and consume.
Monthly Inflation Rate and Average Monthly Price of Brent Crude Oil
Source: CAS – Thomson Reuters
As for producers, especially those in capital-intensive industries, the lower costs of production might translate to an
increase in supply and growth in profits. One example would be the cement sector where the prices go hand in hand with
energy costs, given that cement production is one of the most energy-intensive industries. To produce one ton of cement,
requires 60 to 130 kilograms of fuel oil or its equivalent, depending on the cement variety and the process used, and about
110 KWH of electricity. Therefore, any variation in the prices of energy products will be highly reflected in the upcoming
trends of cement prices.
On the monetary scale, low inflation expectations for an extended period of time, might trigger the Lebanese Central Bank
to respond with additional monetary policy loosening, which in turn, can support economic growth. Recently, BDL planned
another economic stimulus package for 2015 for an amount of $1B, expected to reflect in an economic growth of 2.5%.
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
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60
70
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90
100
110
Average Brent oil Price ($/barrel) (LHA) Inflation Rate (RHA)
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On the fiscal front, government deficit is expected to narrow, thanks to the fall in oil prices, as transfers to Electricite du
Liban (EdL) covering the majority of its oil bill, represent the second largest component of the government’s primary
expenditures, with a share of 22.4%. According to the World Bank, transfers to EdL and oil prices are positively correlated,
with a correlation coefficient of 0.4. Hence, a lower price of oil will reduce these subsidies, which in turn will narrow the
fiscal deficit, however with a 6-9 month lag taking into consideration the structure of outstanding contracts with fuel oil and
gas oil providers.
Transfers to EdL for the first ten months of 2014 already showed a 9.33% year-on-year drop to $1.63B. This was the primary
reason to the 1.50% decline in total expenditure to $11.27B. Consequently, public deficit narrowed 30.71% y-o-y to $2.44B
in October 2014, with a primary balance displaying a surplus of $1.13B, compared to a deficit of $313M during the same
time the previous year.
If oil prices continue to decline, the smaller EdL bill might release more funds for the government to be used in investments
and capital expenditures, electricity being one of them. Worth mentioning, EdL’s generating capacity of 2,019MW is far
lower than the peak demand of 3,195MW, leading to power outages.
As for the external sector, and since Lebanon is an oil-importer, a lower oil price would necessarily narrow the trade deficit.
As a matter of fact, Lebanon’s trade deficit for 2014 contracted by 0.64% y-o-y to stand at $17.19B as imports during the
year displayed a 3.48% decrease to $20.49B. This was mainly due to the 4.36% decline in the mineral products imported to
Lebanon, which represent the largest share of 23.86%. Nevertheless, the volume of mineral products imported increased
from 7,047 tons in 2013 to 7,375 tons in 2014.
While this has a positive impact on Lebanon’s balance of payments, there is a downside for lower oil prices stemming from
the possibility of lower remittances. The effect of a decline in oil prices on remittances from expats in Gulf countries
remains contested, noting that they represent 60% of total transfers to Lebanon. The World Bank expects a decrease in
remittances from GCC countries, but sustains that the overall effect on Lebanon’s balance of payments will remain positive.
According to the World Bank estimates, the relative elasticity of energy imports apropos oil prices is 0.25, higher than the
0.12 of income receipts. This implies that a 1% decline in oil prices would decrease energy imports by 0.25% and
remittances by 0.12%. Furthermore, energy imports to Lebanon are larger than income receipts, which means that the
positive impact on the balance of payments resulting from the decline in imports would more than offset the shortfall
arising from lower remittances.
The positive effect extends to Lebanon’s current account balance, as the Institute of International Finance (IIF) expects the
declining imports to narrow its deficit by 25% to reach 15% of GDP, compared to an equivalent of 21.5% of GDP in 2014.
Another drawback from falling oil prices is lower Arab investments in Lebanon. However, due to the spill-overs of the Syrian
war on Lebanon and the unstable political and security occurrences that Lebanon has been facing, capital-holders have
been reluctant to invest in Lebanon. This means that Investment in Lebanon is already at a really low point, and would not
be affected greatly by oil prices.
The Effect on Lebanese Oil Importers and Distributor
On the micro level, oil importers and distributors in Lebanon had a different take on the falling oil prices.
There are 13 oil importing and distributing companies in Lebanon constituting the Association of Petroleum Importing
Companies (APIC), a non-governmental association founded in 2007. The market is almost shared between the 13
companies, each having around 9-10% of the total. Worth mentioning that there is an arrangement between three
companies: Total, Wardieh and IPT, where Total imports oil and sells it to Wardieh and IPT. Most of these operating
companies import oil from the Mediterranean and Black Sea countries, especially Russia, Romania, Greece, Italy, Turkey,
and sometimes Libya. Some also import oil from France.
Several sources at the Lebanese oil importing and distributing companies confirmed that the recent decline in oil prices had
a deleterious impact on their operations. The lag between their purchasing dates and actual selling time exposed them to
the negative price fluctuation. Distributors usually seal their contracts beforehand at a fixed price. Typically, this price is the
average 3-week price. The oil vessels need almost a month to arrive to Lebanon. By that time prices had decreased, which
caused the oil distributors to sell the oil at a lower price, incurring heavy losses.
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Besides, some of the companies buy almost half of their inventory in October. Those are the companies that have sufficient
silos to store their oil purchases. When prices went down, the latter took advantage of the low prices and increased their oil
imports, storing them in their own tanks and in those of sister companies. Others simply bore immediate losses as they had
no storage facilities. Oil producers are exposed to price risks, and may choose to hedge against its fluctuations or bare
gains/losses along the way.
Oil importers, complaining that demand for oil is inelastic, did not face a higher demand when oil prices declined. However,
demand increased due to the harsh winter weather that Lebanon faced, which coincided with the declining oil prices
reaching to the 5-year minimum. Yet, by that time, a ship importing oil to Lebanon couldn’t dock at the port, and hence, the
country faced a shortage.
Excluding the seasonal effect, long-term behavioral changes in consumption that could lead to a higher demand have not
yet materialized. Moreover, there were no major signs of consumer stocking oil in anticipation of future price rises.
Oil market in Lebanon has no barriers to entry. Any company can distribute oil. However, there are certain legal procedures
that should be done in order to import oil. For instance, they should have an importing permit, a terminal on the port, and
the necessary infrastructure for oil importing. The legal procedures are somehow halted as there is no president in Lebanon.
The oil industry in Lebanon seems saturated, according to one source. So if more companies open in this market, they
would take away shares from the already existing importers and distributors. However, increased capital expenditures and
investments in the country could lead to a growing demand for fuel, an unlikely scenario under the continuing crisis in
neighboring Syria.
To conclude, on a macro level, Lebanon is drilling into the benefits of falling oil prices: higher real income, narrower trade
balance, tighter fiscal deficit, and higher expected economic growth. Certainly, an economic plan attempting to decrease oil
subsidies at this stage and improve government finances would be interesting to examine. On the other hand, the business
players will probably need to put in place hedging strategies to protect them in hardships. The outcomes of the OPEC
meeting scheduled in June of this year or any emergency meeting held beforehand will play a significant role in the
alteration of the expectations mentioned.
The Lebanon Brief
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