Business resilient despite political conflict

1st August, 2007

Consider this paradox: over the past five years, political turmoil has swept the world. It began with the attacks of 9/11, followed by bombings in Bali, Casablanca, Istanbul, Madrid and London. There have been two major American-led wars, in Afghanistan and Iraq. Add to this the war between Israel and Hezbollah in Lebanon.

But during this same period the world economy has experienced its fastest five-year growth spurt in more than three decades. In fact, per capita GDP growth during these stormy years has been 3.2% - higher than any comparable period in recorded history. Analysts suggest, therefore, that the current era of globalisation is more powerful, widespread and resilient than many people realise.

In this article, we consider the ‘war effect’ from the 45-day Israel-Lebanon conflict in July 2006 – an economic yet personal insight through UHY’s member firms in both countries. We spoke with Shmuel ‘Sami’ Naiberg, partner at Shiff-Hazenfratz, Tel Aviv, and Elie Abboud, managing partner of UHY Andy Bryan, Beirut. Both forecast a fast and resilient bounce-back in business conditions once political stability returns.

Israel

The most surprising result of the 2006 war was how strongly and how quickly the economy recovered, says Sami.

Previous wars had been followed by a period of recession and harder business times as war losses and expenses took their toll. But in 2006, the war happened to take place at a time when the Israeli economy was at its strongest. In the immediate aftermath of war the Government moved swiftly to sustain confidence by providing compensation for damage to homes and businesses, as well as by covering the salaries of employees whose livelihoods had been devastated by the conflict.

Another factor was that the war zone structural damage was confined to one-third of Israel, in the north. For the rest of the country it was, by comparison, ‘business as usual’: in the other two-thirds people turned up for work and traded normally, especially to achieve export deadlines.

But wherever Israelis worked, there was always an undercurrent of concern for relatives called up as army reservists, and Israelis’ social lives - such as holidaying away from home in the popular northern Israeli resorts - were largely wiped out. Most people went only to work and then home - nowhere else - and retail businesses suffered as people rarely went shopping, except for essentials, during the conflict.

The Israeli stock exchange lost 10 to 15% across the board (it has since recovered quickly and is stronger than it was before the war), but tourism was badly hit and has yet to recover. The year had been expected to be a bumper year for tourists from abroad and from Israelis holidaying within their own country. "We lost the summer", says Sami, and confidence that tourists will return in 2007 has yet to surface.

Tourism from abroad within Israel had long been damaged by six years of suicide bombings, but recently begun to improve after Israel evacuated Gaza and suicide bombings almost ceased. The war, however, reversed this process.

Even so, the value of the shekel has not been devalued against other currencies – it has survived resiliently. Both Israel’s stock market and its currency were higher on the last day of the war than on its first day. And, although the Central Bureau of Statistics shows the economy shrank 1.4% in Q3 2006, economic growth is now stronger today than it was before the war. Talk of the need to raise corporate taxes to spend more on defence, and on social costs in support of the most needy, have largely subsided as the economy has proved itself resilient.

Foreign investment has also been sustained. It slowed briefly, but, for example, a recent report on the real estate market showed that foreign investment had continued on its upward growth and had been worth USD 2.5 billion over the previous two years. Also, Israel’s interest rate in the aftermath of war was lower than in the US.

The offices of UHY member firm Shiff-Hazenfratz, were thankfully beyond the war zone, but ‘the mood was not at its best’, says Sami. Employees were affected by what was happening to their family members, by having friends and colleagues called up into the reserve army, and by taking in displaced citizens from the north who arrived in great numbers seeking shelter in the southern areas. Estimates show 20% of Israelis were displaced during the war.

The firm also had clients in the war zone. Fortunately, none of Shiff-Hazenfratz’s clients lost their businesses or suffered employee deaths during the war – but several companies in the north did: bombs destroyed factories and agricultural land was set ablaze. No audit work was carried out on site at northern client businesses during the conflict.

Lebanon

"I believe it’s time for all the people to live in peace in this region", says Elie. "Nations have suffered enough. Enough is enough".

Before the conflict, the Lebanese economy was on track to grow by 5% at the end of the first half-year in 2006, reported the International Monetary Fund (IMF). Now, for 2007, the IMF projects a deficit of more than 15% of GDP and Lebanon’s economy is expected to shrink by 5%. Forecasts from the London-based Economist Intelligence Unit are even more bleak.

One example of the war effect is demonstrated by the results of Lebanese real estate developer Solidere, which reported a 2006 Q3 net profit of under USD 4.3 million, a decline of 81.5% compared with the previous year. The main area of its development, central Beirut, was mostly untouched by the fighting, but real estate transactions ground to a halt during the conflict.

As in Israel, tourism has inevitably been hit hardest. In early 2006, stability had been achieved throughout much of Lebanon. Beirut’s reconstruction from the civil war was almost complete, and an increasing number of foreign tourists were visiting Lebanon’s resorts. Tourism then accounted for 15% of the economy and had been expected to rise by USD 2.5 billion during 2006. The conflict put an end to that.

Before violence broke out many Lebanese living abroad had begun to return home and invest in their country. Many Arabs were investing in Lebanon. But investment has largely ground to a halt because of the political instability. "We are facing a bad time here in Lebanon", said Elie. "There are a lot of political problems effecting the economy and instability is detracting new investors for the time being. The next two or three months [from December] will be crucial, but I believe there will be compromise and political resolution, and from there we will have a quick recovery and attract new capital".

UHY Andy Bryan and its team did not suffer directly during the conflict, although the firm lost one client who abandoned outsourcing of its internal audit because of travelling and accessibility problems.

UHY Andy Bryan had to stop most work for a month and a half – "people were sitting at home", says Elie. "The psychological effect was horrible. It was horrible for everybody". But by September "we started to move again" and business was showing signs of recovery in October and November. "We can see again the potential for acquiring new business. It has been manageable", says Elie.

Reconstruction - estimated by the Lebanese government to cost USD 10 billion - will take many years compared with the relatively short conflict. Nine hundred factories, farms and small businesses are reported to have been damaged or destroyed. Power stations, water treatment plants and hundreds of roads and bridges will need reconstruction.

President of the Lebanese International Chamber of Commerce, Wajih Bizri, estimates that more than USD 200 million in direct damage was inflicted on the industrial sector – with dairy, cement, glass and prefab housing factories hit hardest. Factories asking the Lebanese government for reconstruction funds are having to wait their turn behind the rebuilding of essential services.

The global economy’s resilience to bounce back when political stability returns is a phenomenon of hope.

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