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Cablegate: Lebanon: Increase in Flour Subsidies Force Bakeries To

VZCZCXRO6010
RR RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV
DE RUEHLB #0944/01 1820458
ZNR UUUUU ZZH
R 300458Z JUN 08
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 2358
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 000944

SENSITIVE

SIPDIS

STATE FOR NEA/ELA
STATE PASS USTR
TREASURY FOR MNUGENT AND SBLEIWEISS
USDOC FOR 4520/ITA/MAC/ONE
NSC FOR ABRAMS/SINGH/YERGER/DEMOPOLOUS

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV LE
SUBJECT: LEBANON: INCREASE IN FLOUR SUBSIDIES FORCE BAKERIES TO
RETRACT FROM RAISING BREAD PRICES (ECONOMIC WEEK IN REVIEW, JUNE 23
- 29, 2008)

CONTENTS
--------

-- BAKERIES INCREASE BREAD PRICES FOR SEVERAL HOURS, ECONOMY
MINISTRY RAISES FLOUR SUBSIDIES TWICE TO STOP INCREASE
-- BUSINESS OPPORTUNITES IN LEBANON CONFERENCE LAUNCHED, FINANCE
MINISTER WORRIED ON INVESTMENT PROSPECTS
-- MIDDLE EAST AIRLINES EXPANDS ITS FLEET, RECORD NET PROFIT IN
2007
-- ARAB INVESTORS CALL FOR INCREASED ECONOMIC LIBERALIZATION IN THE
REGION
-- DONORS PLEDGE $122 MILLION TO REBUILD PALESTINIAN CAMP, MORE
FUNDS ON THE WAY
-- CASH TRANSFERS INCREASE BY 50 PERCENT IN 2007
-- ECONOMIST INTELLIGENCE UNIT RAISES GROWTH FORECAST FOLLOWING DOHA
SETTLEMENT
-- LEBANESE BANKS ARE THE LEAST RISKY OF NON-GCC MENA ECONOMIES,
AMONG MENA'S BEST IN TERMS OF BANK VALUATION
-- MOODY'S: LEBANON IS THIRD MOST SENSITIVE TO INFLATION SHOCKS IN
MENA REGION


BAKERIES INCREASE BREAD PRICES FOR SEVERAL HOURS, ECONOMY MINISTRY
RAISES FLOUR SUBSIDIES TWICE TO STOP INCREASE
--------------------

1. (U) Following a unilateral decision by the Union of Bakeries on
June 25 to increase the price of Arabic flat bread -- without
consulting the Ministry of Economy and Trade (MOET) -- from $1 to
$1.3, the union retracted its decision on June 26, after the
Ministry decided to further increase its subsidy on flour. This
increase comes in addition to an increase in the subsidy announced
on June 23 by the MOET to compensate for the rise in the costs of
bread production. In light of the increase in the prices of fuel
and a number of other goods mainly through imported inflation, the
possibility of any increase in the price of bread is very sensitive,
representing an additional burden on the population, most of which
finds it hard to manage with already high prices of basic
commodities and low incomes.

2. (SBU) Before the Union of Bakeries accepted to retract its
decision, the head of the General Labor Confederation (GLC) Ghassan
Ghosn quickly called for a protest in front of the Grand Serail on
Monday, June 30, to call on the GOL to lower the price of a packet
of Arabic flat bread. GLC sources told us that the GLC will cancel
its call for a protest.

3. (SBU) Advisor to the Ministry of Economy and Trade Marwan Mikhael
told us on June 27 that since August 2007 until May 2008, the flour
subsidy has cost the GOL around $30 million. From June 2008
onwards, the cost of the subsidy is estimated around $4-5 million
each month. Although Mikhael believes with the recent subsidy
increase, bakeries will be barely able to cover their costs.

BUSINESS OPPORTUNITES IN LEBANON CONFERENCE LAUNCHED, FINANCE
MINISTER WORRIED ON INVESTMENT PROSPECTS
--------------------

4. (U) On June 24, the sixth edition of the Business Opportunities
in Lebanon Conference was inaugurated in Beirut, combining workshops
and exhibitions organized by leading economic and business magazine
Lebanon Opportunities. The U.S. Commercial Service exhibited its
products and began promotion for its upcoming "Made in America 2008"
trade fair.

5. (U) During the opening session, Finance Minister Azour expressed
fear that Lebanon will not be able to attract the investments it
could because of the political stalemate, and called for the
political dialogue to focus on projects and programs instead of
ministerial portfolios. Azour insisted on the liberalization of the
telecommunications and transportation sectors, the privatization of
the national power utility Electricite du Liban (EDL), and the
implementation of Paris III reform measures.

MIDDLE EAST AIRLINES EXPANDS ITS FLEET,
RECORD NET PROFIT IN 2007
--------------------

6. (SBU) Lebanon's national passenger carrier Middle East Airlines

BEIRUT 00000944 002 OF 003


(MEA) received this week its first new acquired Airbus 330-200 as
part of its plan to expand its fleet. MEA's fleet now consists of
one new A330, three leased A330 (whose lease term ends in 2009), and
six A321. MEA plans to acquire six more A330 gradually until 2010
to expand its operations. MEA Chairman Hout told us that MEA
recorded a net profit of more than $60 million in 2007, stressing
that the company can record profits exceeding $70 million if the
political situation remained stable.

ARAB INVESTORS CALL FOR INCREASED
ECONOMIC LIBERALIZATION IN THE REGION
--------------------

7. (U) On June 20, participants at the annual Arab Businessmen and
Investors Conference urged Arab countries to speed up the creation
of free trade zones and the removal of trade barriers, as well as
encourage further economic liberalization and implement
privatization programs. The conference also called for greater
agricultural investments in the region, in order to secure
sufficient food supplies in the Arab world.

DONORS PLEDGE $122 MILLION TO REBUILD
PALESTINIAN CAMP, MORE FUNDS ON THE WAY
--------------------

8. (U) On June 23, the Conference on the Reconstruction and Recovery
of the Nahr El Bared Palestinian refugee camp in north Lebanon was
held in Vienna, during which donors pledged funds for rebuilding the
camp and the surrounding areas. The total contribution announced
was $122 million; we understand this will be corrected to $115.3
million to correct double counting mistakes. The USG pledged $22
million to be divided as follows: $10 million for camp
reconstruction, $6 million for the development of the areas
surrounding the camp, and $6 million to boost the Internal Security
Force's presence surrounding the camp. Meanwhile, PM Siniora
announced that Saudi Arabia, Qatar, Kuwait, and the United Arab
Emirates had pledged to cover half of the bill for rebuilding the
camp, the exact sum to be set on July 1.

CASH TRANSFERS INCREASE
BY 50 PERCENT IN 2007
--------------------

9. (U) According to the Central Bank of Lebanon, cash electronic
transfers to and from Lebanon amounted to $1.06 billion in 2007, up
by 50 percent compared to 2007. Of this, $733.7 million were
transferred electronically to Lebanon, while transfers from Lebanon
amounted to $321.4 million. The United Arab Emirates was the main
source of inward transfers with $147.5 million, while the
Philippines was the number one destination of transfers from Lebanon
with $58.1 million.

ECONOMIST INTELLIGENCE UNIT RAISES
GROWTH FORECAST FOLLOWING DOHA SETTLEMENT
--------------------

10. (U) In its latest report on Lebanon, the Economist Intelligence
Unit (EIU) revised its economic growth forecast for Lebanon to 2.7
percent from -0.7 percent in 2008 and to 3.8 percent from 0.5
percent in 2009. The EIU estimated that the Doha political
settlement encouraged this revision, but warned that growth is
expected to remain well below potential due to political
uncertainties and institutional deficiencies. The report considered
that members of the upcoming coalition Cabinet are unlikely to agree
on the best way to address the country's fiscal and debt challenges,
which in turn would prevent the GOL from implementing its Paris III
reform plan, especially privatization. The EIU also expected
inflation to increase sharply in 2008 due to imported inflationary
pressures.

LEBANESE BANKS ARE THE LEAST RISKY OF NON-GCC MENA ECONOMIES, AMONG
MENA'S BEST IN TERMS OF BANK VALUATION
--------------------

11. (U) Regional investment bank EFG Hermes estimated that the
Lebanese banking sector was the least risky among non-GCC MENA
economies, as well as being one of the most attractive in the MENA
region in terms of valuation based on 2008-2010 earning growth
forecasts. Although Lebanon was assigned the lowest rating in the

BEIRUT 00000944 003 OF 003


region on political and economic risk indicators, it was the least
risky among non-GCC countries in terms of banking industry risks,
which include barriers to entry, and overall regulation and legal
framework. Lebanon also received the highest rating in the entire
MENA region in the bank management category, which include
entrepreneurial management and ability to expand. In addition,
despite recent sluggish economic performance, the Lebanese financial
system has proved extremely resilient to the political turmoil due
to the banking sector's ability to grow its deposit base, EFG Hermes
noted.

MOODY'S: LEBANON IS THIRD MOST SENSITIVE
TO INFLATION SHOCKS IN MENA REGION
--------------------

12. (U) Moody's Investor Service's Inflation Sensibility Index
ranked Lebanon as the third most sensitive country out of 11
surveyed MENA countries. The index measures the extent to which a
country's vulnerability to inflation shocks could potentially damage
its creditworthiness and sovereign ratings. It is an average of a
country's rank in five indicators, GDP-per-capita in purchasing
power terms, level of human development, fiscal balance, net
govenment debt, and annual change in inflation rate.

SISON

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