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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

[email protected]

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 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



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%


Fund Tranche “B”

----- $5,306.56 $5,299.66 0.13%


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%



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



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



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



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



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



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.



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

40

50

60

70

80

90

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



S A L

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.

40

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



S A L

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%

40

50

60

70

80

90

100

110

Average Brent oil Price ($/barrel) (LHA) Inflation Rate (RHA)



S A L

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.



S A L

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

of 17

Your Investment Reference

S A L

Research Department:

Wael Khoury [email protected]

David Achdjian [email protected]

Lana Saadeh [email protected]

Riwa Daou [email protected]

Mirna Chami [email protected]

Maya Mantach [email protected]

Marwan Mikhael [email protected]

mailto:[email protected]

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