Troubled waters for Lebanon's investment games
Simply put, cash is king. The age-old saying never stood more true in terms of existing investments opportunities in Lebanon, says the head of a Beirut-based investment and private equity firm. The logic behind the advice is simple: The risk-to-reward ratio in Lebanon is higher than other countries from a financial investor’s perspective, V-Cap CEO Sami Daher says as he dissects each investment option.
The first investment opportunity that jumps to mind is treasury bonds, but Daher says the yields are not as lucrative as some people believe. A 10-year Lebanese pound-denominated Treasury bond pays around 7.8 percent interest.
At first glance, subscribing to Treasury bonds seems a profitable investment, but taking into account Lebanon’s B- risk rating and an inflation rate of at least 6 percent, investors should give it a second thought, Daher says.
While the inflation rate varies from one source to another, some economists put the 6 percent 2012 estimate by Central Bank Governor Riad Salameh at the low end.
According to the latest figures released by the Central Administration of Statistics, the consumer price index recorded a 10.1 percent year-on-year increase in December 2012.
“Given the inflation rate for Lebanese residents and considering the risk premium, an investor might be better off putting his money into savings deposits that pay up to 6.25-6.5 percent without risking a sudden drop in the par value of bonds in case of an increase in market rates,” Daher says.
“Investing in Lebanese treasury bonds is reasonable as part of a globally diversified portfolio.”
Investing in 10-year dollar-denominated Eurobonds pays around 5.8 percent but investors are exposed to the same risks, Daher adds.
“Contrary to popular belief, buying Eurobonds will not shield investors in the event of a collapse of the Lebanese pound, which would ultimately imply a country default.”
However, Daher explains that while on paper the risk of default remains, Lebanese political parties have shown an interest in maintaining stability and no signs of pushing the country to the brink of collapse.
Lebanon’s debt-to-GDP ratio stood at 136 percent at the end of September 2012, the highest among Arab countries, with GDP growth slumping from 8 percent in 2010 to 1.7 percent in 2011, according to IMF estimates.
The Institute of International Finance has estimated Lebanon’s GDP growth at 0.6 percent in 2012 while experts say the 2012 budget will record the first primary deficit in 12 years, raising the total budget deficit to around 10 percent of GDP.
In a bid to reduce the cost of debt servicing and make the budget deficit more manageable, the government and Central Bank have maintained lower interest rates on short- and medium-term T-bills.
As a result, the Central Bank had to intervene at several stages to buy T-bills, which have become less appealing to local banks that hold about 75 percent of the country’s debt.
At the end of November 2012, the yields on three-month and six-month T-bills stood at 4.43 percent and 4.99 percent respectively. In a T-bills auction held Feb. 7, the average discount rates for the one-year bill and the coupon rate for the two-year and three-year bills stood respectively at 5.08 percent, 5.84 percent, and 6.5 percent. Five-year T-bills paid 6.74 percent in November 2012 compared to 11.5 percent in October 2007.
Sources say the issue of 10-year bonds in September was just one of a series of steps taken by the Central Bank to raise the interest on Lebanese debt, making it more attractive for Lebanese banks, which had cut interest rates on local-currency deposits to compensate for lower T-bill yields.
According to the Association of Lebanese banks, the average interest rate on pound and dollar deposits stood respectively at 5.38 and 2.85 percent in November 2012 compared to 5.43 percent and 2.87 percent in October 2012.
Lower yields on T-bills and provisions against credit losses in Syria took their toll on Lebanese bank profits in 2012.
The country’s five listed banks – Byblos, BLOM, Audi, Bank of Beirut and BEMO – posted an aggregate 2.4 percent growth in profits to $1.01 billion, compared to $986 million in 2011. Excluding the proceeds from the sale of 81 percent of Audi’s LIA insurance arm for $44.5 million, results shows a 2.1 percent year-on-year decline in aggregate net income.
Yet, despite trading at a weighed P/E ratio of 7.5 at the end of December compared to 12.2 in the MENA region, Daher says investing in BSE-listed companies, including but not restricted to bank stocks, is unappealing:
“A long-term investor with a buy and hold strategy has better options in equity markets other than Lebanon. On the other hand, investors seeking to trade the market on the short term will be disadvantaged despite attractive valuations due to inside information.”
Daher explains that flawed regulatory frameworks and lax law enforcement regarding insider trading, among other issues, disadvantages some investors and favors others.
Asked whether the real estate sector remains a window of opportunity amid the gloomy investment map he painted, Daher says an investor has to be selective:
“The sector, overall, is unattractive from a financial investor’s perspective given high prices and the low potential for any appreciation. But if one is selective, some investment opportunities exist. On the other hand, developers of small-size housing units can still benefit from an underserved market.”
He says investors still interested in Lebanon despite all this should diversify their portfolio.
Daher worked as an institutional broker in the United States for 14 years before returning to Beirut in 2006. In 2008 he established V-Cap, a company with offices in Chicago, San Francisco and Riyadh.