Take a hint from Solidere: Lebanon’s flagship share appreciated nicely over the first eight months of the year, settling on a much friendlier market valuation platform close to where analysts had already placed its fair share value. Besides Solidere’s smart restructuring initiative and buyback offer not to mention allegations of a few inelegant machinations – both reported on by Executive – the surge in the share price was also influenced by reliable market whispers that it would take a step beyond the Beirut Stock Exchange and co-list its shares on the bourse of Kuwait (KSE).
This move and the effectiveness of its mere rumor in helping Solidere shares grow, say analysts in Beirut, would a) result in a much improved demand and trading potential for Solidere at the potent KSE and b) demonstrated that the BSE had failed in giving its largest stock the investor exposure it needed. As much as we had been aware of the BSE’s infirmity, the valuable pointer provided by Solidere’s likely KSE listing is that a look at regional stock markets could be well placed in discussing the development options for Lebanese companies and the nation’s financial markets.
Latest estimates of privately held Arab wealth coming to $1.5 trillion and public coffers overflowing with petrol bounty, new all-time highs in share prices at neighboring stock markets are lately being reported more often than one has time to keep track of. Combined market capitalization by the top 150 listed companies in the GCC was $359 billion at the end of July, $121 billion higher than a year ago and more than three times of what it was in 1999, said for instance a report by Shuaa Capital, drooling with excited descriptors such as “engines of growth” and “robustness.”
While some experts recently warned of the potential for Gulf markets to overheat, analysts optimistic about the continuation of the boom point to the fact that the ratios of market capitalization to GDP in the GCC countries are, with exception of Kuwait, still substantially below the ratios in developed economies. Faithful collectors of Executive can easily verify that vigor of Gulf stock markets for themselves by comparing this month’s regional stock market indices (page xx) to those in an issue from January 2003 or June 2001.
Outside of the indices, the evolutionary thrust of Arab stock markets was highlighted last month by a host of news, of which the linkage of the UAE national stock markets in Abu Dhabi and Dubai and the announcement of a new investment conference in Bahrain in October were about the smallest.
The undoubtedly hottest financial infrastructure news of the month was the opening of the Dubai International Financial Centre, DIFC. With its main Gate Building visually quoting the La Grand Arche in Paris in a sort of 21st century Arc d’Arabia way, the center professes that it wants to be the new link between Western and Eastern financial market places – and it has the scope to match these ambitions.
To understand this scope, one needs only look at the DIFC parking “lot.” Upon completion, this facility is designed to accommodate in excess of 34,000 cars. A while back, the DIFC project had temporarily looked a less certain development bet than usual for Dubai, because of fears analysts attributed to the US over what a money hub in the region could do for the likes of al-Qaeda. The DIFC had also experienced a few recent personnel ruckus over Western top executives who were said to have stepped down because of conflict-of-interest situations they witnessed.
But now, not only has the DIFC opened for business and granted its two first operating licenses (to banks Standard Chartered and Julius Baer), the center has also its very own regulatory authority – the DFSA or DIFC Financial Services Authority, touted as fully compliant with the toughest supervisory demands of our age – and its own “international exchange for wealth creation,” the DIFX.
The DIFC International Financial Exchange is billed by its creators as a high-tech stock market for the Arab countries, equipped for trading of all types of securities from equities and funds to derivatives and Islamic structured products. This will presumably take it out of the restrictions applying to national bourses in GCC countries. Gulf-based analysts already speculated early last month that the UAE government might privatize one of its attractive assets, to give the DIFX a birthday present and startup boost.
Curiously enough, just as the DIFC announced its presence, officials from Arab stock markets meeting in Cairo announced that a new pan-Arab bourse under the name of “United Arab Stock Exchange” would be created by early or mid 2005. Located in Egypt, the bourse would enjoy participation from six Arab stock exchanges (including Lebanon, but not mentioning the UAE), and it would be the largest in the region.
Given that full-mouthed announcements for great joint projects in this region come with an inbuilt disbelief factor and cooperation agreements such as the 1996 one between the CASE and KSE acceded to by the BSE have been unnoticeable in practical terms, what to make of these plans for a Unified Arab Stock Exchange?
“I am skeptical, simply because there has been much talk for many, many years about creating a pan-Arab bourse and it hasn’t been done,” said Ziad Maalouf, senior vice-president at newly formed Mena Capital, a Beirut-based private equity and merchant banking firm.
With investor confidence in the BSE thoroughly lacking and performance of the Amman Stock Exchange dismal over many years, Maalouf questioned the viability of a regional stock exchange involving Levant and North African bourses. International investors approached the Cairo and Alexandria Stock Exchange with great enthusiasm about a decade ago, he explained, but proved disappointed as most companies listed on the Egyptian exchange today are so solely because it brings them tax breaks.
Only the stock markets in Tunisia and Morocco are reasonably structured and operate satisfactorily, said Maalouf, who helped as a market analyst with the International Finance Corporation in the mid 1990s to put North African bourses on international investor maps by introducing them to the IFC’s Emerging Markets Group. As competent naysayers long to be proved wrong, individual bourses could yet defeat their ghosts and the pan-Arab bourse could still see the light next year. But a new, Nasdaq-like regional stock market at the DIFC looks far better programmed to become a success.
“It is a good idea. Dubai is at the center of capital in the Gulf. This is where the money is,” Maalouf said. “If companies in the region take this new proposition seriously and dual list at DIFX and the market becomes liquid, it has the potential of becoming a pan-Arab stock exchange and trading desk.” For BSE-listed Lebanese banks for instance, the possibility to dual list on an Arab market would mean exposure to a much wider investor base and the chance to substantially increase trading of their shares.
In summa, the developments of autumn 2004 confirm a triangle of locations vying for prominence in Arab finance. Next to Dubai and Cairo, this includes Bahrain. The emirate underscored its aspiration to the role of regional player by signing a free trade agreement with the United States in the third week of September, albeit ratification of the agreement in the US is not expected before the end of the year.
And Beirut? One point that all experts here seem to be in agreement on is that a convergence of Arab stock markets is in principle a good thing and that it will be beneficial to the country to be involved in such developments. But one cannot ignore a bitter flair to their statements. Regularly, many feel that Lebanon should have risen to the role of natural financial market place for the region. Instead, as the rest of the Arab world noted, the Lebanese were playing politics.
The morale of the story: The nation’s financial sector is being boosted with new blood and ingenuity of personalities willing to go to great length to appear smart (even in what cars they drive) and act congenial, rather than falling for the slowly vanishing styles of the brothers Pompous and Patronizing. Regulations still require improvements and with the insurmountably small domestic market, some obstacles we will never be able to remove. But the financial sector’s real problem is the political superstructure, which dominates the nation’s reality.
