Gulf investors keep faith with Lebanon - for now

DUBAI/LONDON - Gulf Arab investors watched TV images of Israeli aircraft pound Lebanon with growing apprehension over the past days, but most could still see the allure of a country that has come to depend on flows of Middle Eastern petrodollars.

Investments in Lebanon had already factored in the risk of crises such the one that began last week when Lebanon's Hizbollah guerrillas captured two Israeli soldiers and killed eight, investors said.

But with Israeli air-strikes killing more than 200 people, mostly civilians, and causing billions of dollars in damage to Lebanon's infrastructure, analysts said a prolonged crisis could have a serious impact on investment flows.

Lebanon depends heavily on foreign direct investment, which amounted to about 10 per cent of gross domestic product in 2005, to finance a current account deficit that hit nearly 13 per cent of GDP last year.

"(Gulf) money has been one of the reasons for Lebanon's resilience and recovery," said Richard Fox, sovereign credit analyst at Fitch Ratings in London.

"It was restoring itself as a tourist destination for Gulf Arabs, and high oil prices have meant there is a lot of liquidity in the region which is looking for a home...."

From property developer Damac to investment bank Shuaa Capital, firms across the Gulf region said they did not intend to pull out of Lebanon, and some even vowed to press on with plans to expand there.

"Lebanon has always been associated with higher risk and most Arab investors have stayed with Lebanon during tough times," said Haissam Arabi, head of asset management at Dubai-based Shuaa.

Lebanon has historically had strong commercial ties to the world's biggest oil exporting region -- from the Gulf Arab tourists, who first flocked to Beirut before the 1975-1990 civil war, to the large population of Lebanese working in the Gulf.

More recently Gulf money has poured into Lebanese real estate, while small but growing flows of petrodollars helped push Lebanon's stock market up about 10 per cent this year before the fighting erupted.

"We are long-term investors in Lebanon," Hashem Montasser, head of regional asset management at Egypt-based investment bank EFG-Hermes. "We are concerned but we're not going to pull out."

EFG holds a 23 per cent stake in Lebanon's Banque Audi and has about 5 per cent of its US$2 billion ($3.26 billion) portfolio invested in Lebanese real estate and stocks, which profited from the crash in Gulf equity markets this year.

Petrodollars pouring out of the crumbling bourses in Saudi Arabia and Dubai sought refuge in cheaper markets in the Levant and North Africa.

Arabi said Lebanon's stock market, which did not open on Monday after tumbling 14 per cent last week, had been trading on an average of between 12 and 14 times 2006 earnings, compared to around 18-20 times for Saudi Arabia.

"If the market was still open and the prices were getting lower, we would be increasing our position in Lebanon," he said.

Dubai's Damac Properties said it would push ahead with plans to invest US$500 million in Lebanon over the next four years, including a US$150 million luxury sea-front tower in downtown Beirut.

"We see no reason to allow a short-term political situation to have an impact on our long-term investment in Lebanon," Damac chief executive Peter Riddoch told Reuters, adding there had been no cancellations for the tower project.

Elsewhere there were signs of caution.

A European fund manager speaking on condition of anonymity said he had pulled out of Lebanese debt over a year ago. Most foreign fund managers have also limited Lebanon to market weight in their portfolios, he said.

Lebanese government debt exceeds 180 per cent of GDP, but much of it is held by local banks.

Kuwait's Global Investment House decided against investing part of a new US$100 million fund in Lebanon.

"Lebanon becomes a question mark now," said Rakesh Patnaik, head of Global's real estate investment funds.

Ali al Shihabi, chief executive of Dubai-based Rasmala Investments, said foreigners could increase the premium they demand for investing in Lebanon.

Fox said much would depend on how long the crisis continued.

"There will be a negative impact undoubtedly but how big and how long it lasts will very much depend on how long the hostilities continue," he said.

- REUTERS