|When the Beirut Stock exchange reopened in 1995 there were high hopes that it would regain its position as a center of Middle East trading. The bourse was originally established in 1920, second only in the region to the Cairo and Alexandria exchanges of Egypt. As a consequence of the tumultuous civil war years it was forced to close in 1983, during which time other regional bourses grew strongly, particularly fuelled by oil wealth in the GCC, and they have largely outstripped Beirut’s former reputation. Although the market cap of the BSE grew from $8.3 billion at year-end 2006 to $10.9 billion by year-end 2007, it still lags far behind the likes of Kuwait Stock Exchange with a market cap in excess of $70 billion.|
The BSE does have some solidly performing stocks, but is still struggling to gather momentum, with only 11 listed companies. Even at this, Solidere alone represents a large proportion, accounting for 34.7% of market capitalization on December 31, 2007, and 65.1% of market share by value transactions over 2007. However, Fadi Osseiran, chairman of Blominvest Bank that runs the Beirut Blom Index, explained that the banking sector is now beginning to match Solidere, with the two taking a roughly 40-40 split of value transactions. He hastened to add, though, that Solidere’s two listed instruments are still by far the single largest component of the BSE, followed by Bank Audi, something that will not change until there are new listings.
Attracting more IPOs
Unfortunately, few see the climate as particularly favorable for initial public offerings (IPOs). In 2005 the Ministry of Finance and the BSE commissioned a study on how to encourage companies to list and identified 50 potential IPOs. Nonetheless, as Dr. Fadi Khalaf, chairman of BSE, explained “those companies that were thinking of listing have postponed their plans due to the current situation.” Any IPO is a trade-off between encouraging investors to buy and raising capital for the listing company. Khalaf believes that in this case “the problem has not so much been a matter of investor confidence, just that when you start an IPO, you don’t want any surprises, related, for instance, to the political deadlock we are experiencing.”
Some believe that more could be done to entice companies to list. Osseiran pointed out that one can use “the stick and the carrot.” Being more stringent on banking regulations by cracking down on banks that lend to companies with insufficient capital, he believes could “force companies to seek capital in other places” — namely an IPO.
However, the main setback of late to growing the BSE’s market cap was the falling-through of the planned privatization of Lebanon’s mobile telecommunications licenses, which were to have been listed on the BSE. Khalaf commented that the BSE “had been hoping the privatization would take place for some time — you need maybe 100 small IPOs to be equivalent of a few billion dollars of privatized market capitalization.” The privatization of the mobile licenses and listing of the new companies had been hoped to raise upwards of $5 billion. As he pointed out, “in stock exchanges all around the world, including developed countries, what has really boosted the exchanges were privatizations.”
Privatization of the BSE itself is also an issue, currently the exchange runs under the auspices of the Ministry of Finance. Finance Minister Jihad Azour is clearly in favor of privatizing the exchange, stating “our objective is to have capital markets that are privately owned and managed.” Plans were under way for its privatization under a draft law that was being considered by parliament, which since it is not currently convening, is unlikely to be passed anytime soon. An independent regulatory body should also come hand in hand with privatization. In the view of Osserian “a regulatory authority is of utmost importance, without it the stock exchange has no father or mother to defend it. Unless you set up a capital markets authority you will not find the driving force for the BSE.”
Biggest regional issuer of bonds
Lebanon certainly retains strengths, especially in terms of financial expertise. In the minister’s eyes, Lebanon “could easily be the regional leader in the fixed-income market.” He cited the fact that it is the biggest regional issuer of sovereign and private debt and that Lebanon’s banks are active market makers who have experience in leading eurobond issues.
Although euro and sovereign bonds have been listed on the stock exchange with a zero commission on trading as instructed by the finance ministry, they are not actually traded. According to Khalaf, “the market between banks is actually liquid, they just don’t choose to trade on the stock exchange, even with the zero commission incentive.”
There is the possibility that a new instrument may list on the exchange by the end of the year, in the form of the Blom Index. Osseiran explained that “initially we only set up the index for bench marking purposes, but this year we went live as a prelude to trading.” The form of the instrument and whether it will actually be traded on the exchange waits to be seen. As he pointed out, “we have not yet finalized the details, whether it will be a fund or a stock.” So while there may not be any new company listings, there is at least the possibility that another instrument will list in the near future.