THE LEBANON BRIEF. ISSUE 861 Week of March, 2014

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1 Your Investment Reference THE LEBANON BRIEF ISSUE 861 Week of March, 2014 ECONOMIC RESEARCH DEPARTMENT Rashid Karame Street, Verdun Area P.O.Box Beirut, Lebanon T (01) F (+961) research@blominvestbank.com

2 The Lebanon Brief Table Of Contents Page 2 of 14 TABLE OF CONTENTS FINANCIAL MARKETS 3 Equity Market 3 Foreign Exchange Market 5 Money & Treasury Bills Market 5 Eurobond Market 6 ECONOMIC AND FINANCIAL NEWS 7 BoP Deficit Narrowed to $31.3M in January Commercial Banks Assets Reach $164.43B in January Value of Kafalat Guarantees Reach $18.47M by February RAMCO: Beirut s Residential prices Hit $7,647 per SQM 9 Registered New Cars Post a 5.2% y-o-y growth by February CORPORATE DEVELOPMENTS 11 Bank Audi S.A.E s Profit Rose to $53.33M in FOCUS IN BRIEF 12 Lebanon s Lending Activity in 2013: Resilience amidst Tough Climate 12 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.

3 The Lebanon Brief Page 3 of 14 FINANCIAL MARKETS Equity Market Stock Market 14/03/ /03/2014 % Change BLOM Stock Index* 1, , % Average Traded Volume 38, , % Average Traded Value 569,497 1,599, % *22 January 1996 = 1000 BLOM Stock Index HI: 1, The slump in international equity markets may have been partially behind the Beirut Stock Exchange s (BSE) decline this week, but mainly it is the continuing lack of consensus over the controversial policy statement that drove down the BLOM Stock Index (BSI) by 0.09% to settle at 1, points by the end of the week. Hence, the BSI s performance tightened to a positive 6.18% Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Banking Sector Mkt 14/03/ /03/2014 %Change BLOM (GDR) BSE $9.05 $ % BLOM Listed BSE $9.00 $ % BLOM (GDR) LSE $9.03 $ % Audi (GDR) BSE $6.46 $ % Audi Listed BSE $6.51 $ % Audi (GDR) LSE $6.40 $ % Byblos (C) BSE $1.66 $ % Byblos (GDR) LSE $73.00 $ % Bank of Beirut (C) BSE $19.00 $ % BLC (C) BSE $1.85 $ % Fransabank (B) OTC $28.00 $ % BEMO (C) BSE $1.82 $ % Mkt 14/03/ /03/2014 % Change Banks Preferred Shares Index * % BEMO Preferred 2006 BSE $ $ % Audi Pref. E BSE $ $ % Audi Pref. F BSE $ $ % Audi Pref. G BSE $99.30 $ % Audi Pref. H BSE $ $ % Byblos Preferred 08 BSE $ $ % Byblos Preferred 09 BSE $ $ % Bank of Beirut Pref. E BSE $27.00 $ % Bank of Beirut Pref. I BSE $26.60 $ % Bank of Beirut Pref. H BSE $27.00 $ % BLOM Preferred 2011 BSE $10.19 $ % BLC Pref C BSE $ $ % Bemo Preferred 2013 BSE $ $ % * 25 August 2006 = 100 LO: Moreover, activity on the BSE weakened from the previous week, with the daily average volume and value of trades losing a respective 91% and 64% to 38,079 shares and $569,497. Likewise, the market capitalization decreased by $8.52M to reach $9.81B. On a comparative scale, the BSI outperformed this week both Morgan Stanley (MSCI) Emerging index and the S&P AFE40. In fact, the MSCI Emerging index fell by 2.79% to points as all emerging equity markets suffered from investors shift in favor of safe haven assets, following their rising concerns over the weakening economic performance in China and the persisting crisis in Ukraine. As far as the S&P AFE40 is concerned, it lost 0.48% to settle at points on higher worries within the MENA region. In contrast, the S&P Pan Arab Composite LargeMidCap Index edged up by a weekly 0.30% to points. As for Arab bourses, Egypt, Saudi Arabia and Bahrain were the sole performers to end the week with respective gains of 2.40%, 1.48% and 0.11%.Meanwhile, Dubai, Abu Dhabi, and Qatar were the week s worst performers with respective losses of 4.16%, 2.92% and 2.27%. Within the banking scene, financial stocks extended their dominance over the BSE this week with a market share of 55.84%. Byblos common shares edged up by a weekly 1.84% to close at $1.66. In contrast the Global Depository Receipts (GDR) of BLOM and Audi declined by 0.98% and 2.12% to reach $9.05 and $6.46, respectively.

4 The Lebanon Brief Page 4 of 14 Real Estate Mkt 14/03/ /03/2014 %Change Solidere (A) BSE $13.02 $ % Solidere (B) BSE $12.96 $ % Solidere (GDR) LSE $13.04 $ % Manufacturing Sector Mkt 14/03/ /03/2014 %Change HOLCIM Liban BSE $14.89 $ % Ciments Blancs (B) BSE $3.50 $ % Ciments Blancs (N) BSE $2.75 $ % Funds Mkt 14/03/ /03/2014 % Change BLOM Cedars Balanced Fund Tranche A $7, $7, % BLOM Cedars Balanced Fund Tranche B $5, $5, % BLOM Cedars Balanced Fund Tranche C $5, $5, % BLOM Bond Fund $9, $9, % As for the BLOM Preferred Shares Index (BPSI), it improved by 0.17% to points, lifted by the performance of Byblos preferred shares 09, which rose by 1.58% to $ and by the performance of BEMO s preferred 2013 shares, which gained 1.60% to settle at $ However, Audi Preferred shares class G slipped by a weekly 0.70% to end the week at $ On the London Stock Exchange, BLOM GDRs decreased by a weekly 0.77% to $9.03. In contrast, Solidere GDR shares grew 1.51% to end the week at $ In the real estate sector, Solidere shares, which grasped the remaining 44.16% of total weekly traded value, witnessed a mixed performance. Solidere stocks Class A edged down by a weekly 1.14% to $13.02, while its B counterpart added 0.93% to close at $ Looking ahead, Lebanese stocks will continue to be linked to political developments, and are expected to increase if an agreement is reached over the cabinet s policy statement, otherwise further weakness is expected. Retail Sector Mkt 14/03/ /03/2014 % Change RYMCO BSE $3.50 $ % ABC (New) OTC $33.00 $ % Tourism Sector Mkt 14/03/ /03/2014 % Change Casino Du Liban OTC $ $ % SGHL OTC $7.00 $ %

5 The Lebanon Brief Page 5 of 14 Foreign Exchange Market Lebanese Forex Market 14/03/ /03/2014 % Change Dollar / LP 1, , % Euro / LP 2, , % Swiss Franc / LP 1, , % Yen / LP % Sterling / LP 2, , % NEER Index** % *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. Nominal Effective Exchange Rate (NEER) Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Money & Treasury Bills Market Money Market Rates 07/03/ /02/2014 Change bps Overnight Interbank BDL 45-day CD BDL 60-day CD Treasury Yields 07/03/ /03/2014 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 The Lebanese pound retreated against the dollar this week as its peg against the greenback went from $/LP with a mid-price of $/LP 1504 to $/LP with a mid-price of $/LP Foreign assets (excluding gold) at the Central Bank stood at $36.22B by February compared to $35.62B at end of January. Meanwhile, the dollarization rate of private sector deposits stood at 66.1% in December compared to 65.7% a month earlier. The euro continued to benefit from Mario Draghi s decision to keep interest rates unchanged. However, European exporters are worried that further upturns in the 17-nation currency might reduce the competitiveness of their products on international markets. By Friday March 14, 2014, 12:30 pm Beirut time, the Euro edged up by 0.04% to /$ As for the dollar-pegged LP, it depreciated to /LP 2, from a previous /LP 2, The Nominal effective exchange Rate (NEER) slid by 0.08% over the cited period to points, while its year-to-date performance registered 24.61%. During the week ending February 27th, 2014, broad Money M3 rose by LP 423B ($280M), to reach LP 168,303B ($111.64B). M3 growth rate reached 6.64% year-on-year and 0.44% on a year-to-date basis. As for M1, it increased by LP 239B ($158M) due to the rise of LP 244B ($162M) in demand deposits and the LP 5B ($3M) slip in money in circulation. Total deposits (excluding demand deposits) advanced by LP 185B ($123M), given the LP 135B rise in term and saving deposits in domestic currency and the $33M increase in deposits denominated in foreign currencies. Over the above mentioned period, the broad money dollarization rate edged down from 58.91% to 58.80%. According to the Central Bank, the overnight interbank rate stood at 2.75% at the end of December In the TBs auction held on March 06th, 2014, the Ministry of Finance raised LP939B ($623M) through the issuance of 1 Year (1Y), 2Y and 3Y Treasury Bills. The highest demand was witnessed on the 3Y notes, capturing 74% of total subscriptions, while the 1Y bills and 2Y notes captured respective shares of 5% and 21%. The average discount rates for 1Y bills stood at 5.08% while the coupon rate for the 2Y and 3Y notes respectively stood at 5.84% and 6.50%. New subscriptions exceeded maturing T-Bills by LP 132B ($87M).

6 The Lebanon Brief Page 6 of 14 Eurobond Market Eurobonds Index and Yield 13/03/ /03/2014 Change Year to Date BLOM Bond Index (BBI)* % 0.68% Weighted Yield** 5.57% 5.58% Weighted Spread*** *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) Eurobonds Lebanese Government Maturity - Coupon 13/03/2014 Price* 06/03/2014 Price* Weekly Change % 13/03/2014 Yield 06/03/2014 Yield Weekly Change bps 2015, Jan % % 3.76% 3.87% , Aug % % 3.82% 3.80% , Jan % % 4.24% 4.21% , May % % 4.40% 4.40% , Mar % % 4.91% 4.91% , Jun % % 5.09% 5.14% , Mar % % 5.75% 5.75% , Apr % % 6.07% 6.08% , Oct % % 6.28% 6.30% , Jan % % 6.38% 6.38% , Dec % % 6.56% 6.57% , Nov % % 6.62% 6.62% , Nov % % 6.76% 6.76% 0 *Bloomberg Data Weighted Effective Yield of Eurobonds 6.50% 6.00% 5.50% 5.00% 4.50% Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Activity on the Eurobonds market managed to end the week in the green partly due to the steady demand for debt in Lebanon as the low prices of bonds remained highly appealing. Accordingly, the BLOM Bond Index (BBI) inched up 0.02% to points, outperforming the JP Morgan emerging markets bond index that lost 0.58% to points. The latter was pulled down by the rising concerns over the Ukrainian turmoil and the weakening Chinese data. Back to Lebanon, 5Y and 10Y Lebanese Eurobonds are currently providing respective yields of 5.38% and 6.5%, registering each a 1 basis point (bp) decline from last week. In the US, Treasuries kept on gaining investors interest this week as no resolution of the conflict between Ukraine and Russia has been reached yet. In addition, the Chinese investment growth showed the weakest year-to-date performance since 2001 driving investors back to safe assets. Higher demand for US Treasuries translated into the 5Y and 10Y yields slipping from last week s 1.57% and 2.74% to 1.53% and 2.66%, respectively. Accordingly, the 5Y and 10Y spread between the Lebanese Eurobonds and U.S benchmarks broadened by 3 bps and 7 bps to stand at 385 bps and 384 bps, respectively. Concerning the annual cost to hedge against the Lebanese country default through 5Y credit default swaps (CDS), it slightly changed from last week s quote of bps to bps this week. In regional markets, insurance premiums on sovereign debt for 5Y in Saudi Arabia and Dubai broadened from bps and bps to bps and bps, respectively. As for emerging markets, the 5Y insurance premiums against state-debt default closed at bps in Turkey and bps in Brazil, up from last week s respective ranges of bps and bps.

7 The Lebanon Brief Page 7 of 14 ECONOMIC AND FINANCIAL NEWS BoP Deficit Narrowed to $31.3M in January 2013 Balance of Payments In January (in $M) (44) Lebanon s Balance of Payments (BoP) recorded a deficit of $31.3M in January 2014, compared to a surplus of $382.5M registered in the same period last year. The deficit in January came as net foreign assets (NFA) of the Central Bank rose by $602.7M, while the Commercial Banks NFAs dropped by $634.0M. This is partly due to the broadening trade deficit that reached $1.63B in January this year highlighting the trailing repercussions of 2013's regional and local uprisings on the external position of the country. (310) (259) -290 Source: Banque du Liban Commercial Banks Total Assets In January ($B) Total Assets (LA, In $B) Total Assets Growth Rate (RA,In %) Source: Banque du Liban 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Commercial Banks Assets Reach $164.43B in January 2014 Commercial banks total consolidated assets grew by an annual 7.4% to reach $164.43B in January 2014, as opposed to a growth rate of 7.2% in January Claims on the resident private sector, accounting for 25.2% of total assets, grew by 8.5% y-o-y to $41.36B. In details, Dollar denominated private loans advanced by 6.5% to $30.15B while those denominated in Lebanese pounds (LBP) rose by 14.2% to $11.21B.Lending to the public sector advanced by 21.8% in the first month of 2014 to $37.97B, as holdings of treasury bills in LBP edged up by 15.3% to $20.18B and holdings of Eurobonds increased by 30.1% to $17.71B. In addition, claims on the nonresident private sector progressed by 1.7% in 2014 to reach $5.68B. On the liabilities side, resident private sector deposits increased by 6.3% to $107.67B, with deposits in foreign currencies augmenting by a yearly 7.1% to $64.60B and those in LBP adding 5.2% to $43.06B. As for non-resident private sector deposits, they advanced by 11.9% y-o-y to $27.19B, compared to a previous $24.30B. The dollarization rate of private sector deposits rose from 64.7% in January 2013 to 65.6% in January 2014.

8 The Lebanon Brief Page 8 of 14 Value of Kafalat Guarantees Reach $18.47M by February 2014 Breakdown of Kafalat Guarantees by Sectors Agriculture Industry Tourism Other Source: Kafalat Kafalat issued 65 guarantees in February 2014 compared to 58 in the same period of Yet, total loan value posted a significant 13.5% year-on-year decline to $7.81M in February this year. Accordingly, the average amount per loan stood at $120,188 in February 2014, down from $155,728 last year. On a cumulative basis, Kafalat issued 136 guarantees up to February 2014 compared to 115 guarantees for the same period in 2013, which represents an 18.3% y-o-y increase. Accordingly, Loans extended to small- and medium-size companies under the guarantee of Kafalat touched $18.47M up to February 2014, up by 17.0% from $15.79M in the same period last year. In terms of sectors, the three largest beneficiaries of loans were the agricultural sector with a share of 52.2%, the industrial sector with a share of 35.3% and the tourism sector with a share of 8.1%. The number of agricultural and industrial loans edged up by yearly 69.0% and 9.1% to 71 and 48 guarantees, respectively. However, the unstable security status that kept hindering tourism performance pulled down the number of issued guarantees to the tourism sector that dropped from 19 in the first two months of 2013 to 11 by February By geographical allocation, Mount Lebanon remained the leading region in terms of Kafalat guarantees with a share of 36.8% followed by stakes of 25.0% in the Bekaa region and 14.7% in the North. The number of Kafalat loans substantially increased in all geographical areas except for Beirut region where it tumbled by 33.3% to reach 6 guarantees over the first two months of This can be mainly explained by the low base reached in 2013 rather than the improving investment sentiment in the country.

9 The Lebanon Brief Page 9 of 14 RAMCO: Beirut s Residential prices Hit $7,647 per SQM The 5 Most Expensive Neighborhoods in Beirut Neighborhood Average Sales Price BCD $7,647 Ain el Mreisseh $7,000 Raouche $6,557 Jal el Bahr $6,500 Ramlet el Baida $6,052 Source: RAMCO After covering the prices of apartments currently under construction in Beirut, the real estate consultant RAMCO lately released a recent research publication about residential prices of neighborhoods through the capital. The study, which enclosed 382 buildings under construction across Beirut, revealed that an adjustment phase in the residential market started in 2013 after several years of price increases. The asking value for an apartment in Beirut ranges between $1,925 and $7,647 per Square Meters (SQM). Worth mentioning that the plotted apartments are located on the first floor in buildings under construction spread in 69 neighborhoods of Beirut. Accordingly, Beirut Central District (BCD) stood as the most expensive area in terms of residential prices with an average price of $7,647 per SQM. As for the Western half of Beirut, RAMCO revealed that prices hovered according to their proximity to the seashore line. This means that asking sales prices are the highest along the seashore and decrease progressively as they go inland. On the eastern part of Beirut, and in Ashrafieh specifically, prices reach their levels at the top of the neighborhood s hill in the area of Rizk Tower and decline gradually as they reach the Port of Beirut and the south-eastern hills that oversee Nahr Beirut. RAMCO declared that the central neighborhoods located between the western and eastern Beirut post the lowest residential prices. However, the three most expensive areas in Beirut were BCD ($7,647 per SQM), Ain el Mreisseh ($7,000 per SQM) and Raouche ($6,557). In contrast, the cheapest three neighborhoods across Beirut were Noueiri ($1,925 per SQM), Tarik Jdideh ($2,101 per SQM) and Bachoura ($2,200 per SQM). The publication pointed to a slowing phase in the residential market of Beirut after a hiking prices period following corrections in prices. Therefore, many developers are currently more open for price negotiations with some of them willing to offer approximately 10% of discount.

10 The Lebanon Brief Page 10 of 14 Registered New Cars Post a 5.2% y-o-y growth by February 2014 Total New Cars by February 6,000 35% 5,302 5,038 30% 4,839 5,000 25% 4,008 4,079 20% 4,000 15% 3,000 10% 5% 2,000 0% -5% 1,000-10% - -15% Cars Number (LA) Cars Growth Rate (RA, In %) Source: AIA According to figures released by the Association of Car Importers in Lebanon (AIA), registration of new passenger and commercial cars picked up by 5.2% to 5,302 by February 2014 compared to 5,038 in the same period last year. In fact, the number of registered new passenger vehicles increased by 4.4% y-o-y to 4,930 while that of commercial cars edged up by 18.1% y-o-y to 372. This increase followed a previous 21% monthly growth in January probably alluding to an improving sentiment amongst private sector investors especially after the long awaited Cabinet formation in Mid-February. Worth mentioning the sector s huge efforts to survive amid the disastrous economic, political and security situation prevailing in the country. Aggressive marketing strategies, via promotions and campaigns, are accomplished to uplift importers drowning profits. However, the bulk of vehicles sold in Lebanon are generally small engine fuel efficient automobiles with low price tags, while luxury cars represented less than 5% of total new car sales. This substitution effect in favor of cheap automobiles was clear in the car sales breakdown by brand that kept on ranking Kia at the top with a 23.67% share of the total, followed by Hyundai (18.13%), Toyota (12.54%) and Nissan (11.34%). According to their market share the top five distributors in Lebanon are respectively: NATCO (22.0%), Century Motor Co (17.5%), BUMC (13.0%), RYMCO (12.2%) and Bassoul Heneine (8.1%).

11 The Lebanon Brief Page 11 of 14 CORPORATE DEVELOPMENTS Bank Audi (S.A.E) 2013 Financial Highlights 12-Dec 13-Dec % change Customer's Deposits 2, , % Net Loans & Advances to Customers 1, , % Total Assets 2, , % Net Profit % Shareholders Equity % Yearly Performance of Audi Common Shares $7.20 $7.00 $6.80 $6.60 $6.40 $6.20 $6.00 $5.80 $5.60 $5.40 Bank Audi S.A.E s Profit Rose to $53.33M in 2013 Bank Audi S.A.E, the bank s Egyptian subsidiary, recorded a profit of $53.33M in 2013, a 47.9% year-on-year (y-o-y) increase. In details, net interest income and net income from fees and commissions increased by 9.6% and 13.4% y-o-y to reach $102.61M and $23.49m, respectively. As for total assets, they increased by an annualized 19.9% to $3.25B as loans and facilities to customers rose by 14.8% to $1.55B. On the liabilities side, customers deposits and total shareholders equity registered yearly upturns of 21.9% and 15.4% to $2.84B and $221.75M, respectively. Within its expansion strategy, Bank Audi sal announced this week its partnership with IFC, a member of the World Bank. The agreement between the two entities aims the support of Bank Audi s regional platform and expanding the bank s capital base by providing subordinated loans worth $150M for 10 years. On another note, and after the resignation of one Bank Audi s shareholders, Mario Saradar, the name of the institution was officially changed from Bank Audi Audi Saradar Group to Bank Audi, effective March 12. Source: Company s Website, BSE and BLOMINVEST Data

12 The Lebanon Brief Page 12 of 14 FOCUS IN BRIEF Lebanon s Lending Activity in 2013: Resilience amidst Tough Climate Subsidized loans Dec 2013, $M Total Subsidized loans (A+B+..) % -25.3% 28% Industry % -24.0% 2% Tourism % -30.3% 91% Agriculture % -13.6% 41% A- Subsidized-Medium & Long Term Loans % -26.0% 36% Industry % -24.1% 4% Tourism % -30.5% 105% Agriculture % -13.3% 101% B-Subsidized-Interest Loans guaranteed by % -16.5% 0% Kafalat Industry % -14.7% -11% Tourism % -22.7% 20% Agriculture % -13.9% 6% Source: Banque du Liban Over the course of 2013, the Lebanese economy faced critical operating conditions. The macroeconomic backdrop was rattled by recurrent security incidents and political deadlocks on one hand and by spillovers from war-ridden Syria on another hand. Consequently, the International Monetary Fund (IMF) lowered Lebanon s growth projection to a subdued 1% in 2013, making it one of the slowest amidst MENA countries. Despite the low growth environment, lending activity still managed to advance in 2013, due to the Central Bank s stimulus package and due to commercial banks ample liquidity. Zooming-in on this facet of the economy is a must, especially since Lebanon had the 20 th highest loan penetration in the world in 2012, according to the IMF. The private sector wasn t at bay from the eco-political turmoil as reflected by the BLOM Lebanon PMI readings. The index was tightly hanging on to the 50-points mark separating economic expansion from contraction in May 2013, when data collection began, but dropped well below that threshold to reach 44.7 in January However, the accumulated surpluses in the Balance of Payments (BoP) prior to 2011, allowed Lebanese banks to be endowed with large liquidity and assume their role of chief financiers for both the public and private sectors. Hence, commercial banks delivered an annual 9% growth in total assets amounting to $164.82B in 2013, as opposed to a growth rate of 8% last year. The healthy balance sheet results came about as total private loans, representing 29% of total assets, grew by 9% y-o-y to $47.38B and as claims on the public sector, representing 23% of total assets, advanced by 21% y-o-y to $37.67B. Claims on the resident private sector, accounting for 25% of total assets, grew by 10% to $41.50B. Dollar denominated private loans advanced by 8% to $30.39B while those denominated in Lebanese pounds (LBP) rose by 14% to $11.12B. Local currency loans registered a more pronounced progression, as a result of BDL s endeavors to tame the dollarization rate of loans, which has steadily decreased from 80.3% in 2010 to 76.5% in Meanwhile claims on the non-resident private sector progressed by 9% in 2012 they only advanced by 5% in 2013 to reach $5.88B. The Central Bank s (BDL) statistics regarding total credit facilities granted in the financial sector, offer insight on the loans sectorial distribution. Loans to individuals grasped the lion share of total loans with a 27.84% stake, followed by Contracting & Construction with 17.35%, Wholesale Trade with 14.93% and finally Processing Industries with 10.33%. All categories recorded double-digit y-o-y growths expect for Processing Industries due to a pronounced 36.8% decline in the Tobacco, Tombac and cigarettes category.

13 The Lebanon Brief Page 13 of 14 Credit facilities destined for individuals advanced by an annual 14.66% to reach $14.73B in The value of consumption and housing loans, the largest two sub-components grew by 12% and 17% to $4.17B and $8.53B, respectively. In fact, BDL took several initiatives to revive economic growth. On January 14, 2013, BDL issued Intermediate Circular 313, announcing a stimulus package worth $1.47B. The funds were put at the banks disposition at a 1% interest rate, in order for them to offer further support to housing projects as well as small and medium enterprises. In the intermediate circular #340, legal reserves were scaled down by up to 80% against housing loans from Banque de l habitat /Housing Bank. In late 2012, Intermediate circular #311 widened the lending scope by raising the permitted ceiling on banks credit facilities both locally and abroad. Aside from BDL s incentives, housing loans continued to grow as real estate is considered to be a form of investment for individuals and as it often entails large down payments. Credit facilities granted to residential and commercial building contractors posted 19% and 14% y-o-y growths in spite of the slowdown in construction activity. According to data released by the Orders of Engineers in Beirut and the North, the number of issued permits declined by 8% in 2013 from 18,193 in 2012 to 16,724 in In the field of wholesale trade, the most pronounced upturns were registered in the sub-sectors of Pharmaceuticals and Medicines (37%) as well as oil and oil products (22%). This may have been brought about by the heavy influx of Syrian refugees into the country which places upward pressure on basic services such as health and energy. As for processing industries, it was the only category which did not post a double-digit y-o-y growth. This was the result of a pronounced 36.8% decline in the Tobacco, Tombac and cigarettes category. However, the industry concerned with meat stuff, food and beverages as well as that concerned with textiles and fabrics compensated with upturns of 10.3% and 25.2%, respectively. These increases may not have stemmed from more vivid local demand but rather from the inflow of Syrian refugees. Nevertheless, as the tourism sector slowed substantially in 2013, lending destined for this sector followed the same path. According to the Ministry of Tourism, tourist arrivals fell by 91,483 or 6.7% in 2013 to reach 1,274,362. The sector s subdued activity is a direct consequence of the internal and regional instability. Especially as travel bans for Arab tourists, a vital component for the industry, were renewed on several occasions during the year. Therefore, credit facilities extended to personal, cultural, leisure and tourist services dropped by 21.24% in Being aware of the rough patch witnessed by key economic sectors such as tourism, BDL sought to boost economic activity through subsidized loans. In fact, BDL offers subsidized loans in two forms. Either the BDL reimburses the bank with part of the interest charged or it frees up the banks liquidity through reduction or exemption of its legal reserves. In this line of thought, the BDL issued intermediate circular #349 in December 2013, according to which the BDL grants facilities to banks at 1% against various loans subsidized or steered towards productive sectors, environmentally friendly initiatives or housing. As for Intermediate circular #340, it extended the duration of subsidized loans from 7 to 10 years. In spite of these endeavors, 2013 marked a sharp decline in the value of new subsidized loans. The latter, fell by an annual 22.3% to $529.66M in 2013 compared to a more pronounced decline of 25.3% in the period when the Arab spring erupted. In 2013, the industrial sector took up 52% of total subsidized loans followed by shares of 35% and 13% for the tourism and agricultural sectors. Subsidized loans to the industrial sector posted the biggest annual drop of 24.7%, closely followed by slips of 23.4% and 8.2% in loans destined for the tourism and agricultural sectors. The downward trend was also witnessed in the number of Kafalat guarantees. Kafalat, which provides financing for small and medium enterprises (SMEs), issued 871 guarantees in 2013 compared to 1025 in Accordingly, the overall value of Kafalat loans plummeted by 14% from $137.92M in 2012 to $118.16M in 2013.

14 The Lebanon Brief Page 14 of 14 Kafalat loans to the industrial and tourism sectors fell from 392 and 177 in 2012 to 293 and 142 in 2013, respectively. Meanwhile, the geographical allocation showed that regions which usually grasp the biggest stake of Kafalat loans, witnessed the largest drop in investor confidence. Kafalat loans in the North, which has been shaken by recurrent security clashes across the year, registered a 29% annual decline to 99 followed by slips of 18% and 15% in Mount Lebanon and South Lebanon to 348 and 117, respectively. The BDL branched out and sought to revive the economy via alternative channels. Through Circular #331, the BDL allowed banks to step in to finance startups, venture capital firms, incubators and accelerators working in the knowledge economy, not through usual debt, but this time through equity. Nevertheless, only the year ahead can unravel just how efficient this decision has been. One thing is however certain, the banking sector is still fueled with enough liquidity to provide financing for the private and public sectors, without sacrificing one for the other. Banks stepped in once again as chief financiers of public debt. In fact, lending to the public sector advanced by 21% in 2013 compared to 7% in Claims on the public sector amounted to $37.67B in 2013, with holdings of treasury bills in LBP edging up by 11% to $19.98B and holdings of Eurobonds increasing by 35% to $17.61B. However, a continuous increase in fiscal deficit might take up more resources from the banking sector and start to crowd out the private sector. The government s fiscal deficit widened by 31.4% to $3.52B by October 2013, with aching growth pulling revenues down and with the heavy influx of Syrian refugees lifting the government s expenditures. Moreover, the BoP, a reflection of the change in the BDL and commercial banks net foreign assets, has now recorded its third annual deficit of $1,128.7M in 2013 compared to a deficit of $1,536.9M registered last year. Looking ahead, the BDL launched yet another stimulus package for 2014 worth $800M, with a special focus on housing loans. Although BDL s incentives, the commercial banks cautious strategy and ample liquidity offer great support to the economy, political stability remains an inescapable condition for robust and long-term growth.

15 The Lebanon Brief Page 15 of 14 Research Department: Riwa Daou Mirna Chami Marwan Mikhael Your Investment Reference