Back in the mid 1990s, Lebanon showed a promising entry into the world of capital markets, which coincided with the significant boom of emerging markets during that period. The first Eurobond in US dollars issued by an Arab state was the 1994 $400 million Eurobond issue by the Lebanese Republic, which also became “Eurobond deal of the year.” The Lebanese government went on to issue debt securities, both domestically and internationally to this day, and at one stage became the only “frequent issuer” of debt securities in the Arab world. The Lebanese corporate world also followed suit in 1994 and subsequent years with a series of Eurobond issues by the larger banks, around five GDR (Global Depositary Receipts, or a form of stock issue) issues by Banque Audi (two issues), Banque du Liban et d’Outre Mer, Banque Libanaise pour le Commerce, and Solidere, and a few initial public offerings (Bank of Beirut, Rymco, Bou Khalil, etc.). The first Banque Audi GDR was also the first GDR issue in the Arab world and in the Middle East North Africa region ever, and was considered by finance specialists and investment bankers in places like London to have been a very gutsy decision by Banque Audi’s management.
But what happened since? With the exception of the odd Lebanese government issue (generally to repay the older issue, which had come to maturity) and the recent bond issue of First National Bank, the Lebanese capital markets are now considered to have lost their momentum. One of the main reasons for the relative dying out of the Lebanese capital markets was that domestic investment banks never established themselves properly. The few investment banks that had set up shop in Beirut in the mid-1990s either had extremely limited human, operational, and capital resources to build the foundations of large and liquid capital markets in Lebanon, or were staffed with inexperienced individuals, who lacked the necessary rigor and diligence, so crucial in this industry. Most of these investment banks have now been reduced to very small sizes, while others have been absorbed by the larger local commercial banks. The rare competent investment bankers have now left the country for greener pastures, and are now exercising their craft in a booming investment banking industry in Dubai, or are trying to make it as golden boys in London, New York, and even as far as Hong Kong.
The burst in the emerging market bubble in the late 1990s did not help the Lebanese capital markets’ cause either. With demand for bonds and stocks issued by Russian, Asian, Egyptian and South American companies and governments collapsing overnight, the Lebanese dream of developing the capital markets turned into a nightmare. Indeed, the Lebanese government, which had issued a series of Eurobonds and Lebanese pound Treasury bills before the emerging market crisis, found it much more difficult to issue bonds (mainly to repay old issues) and became constrained to selling their new issues to the local commercial banks, who became stuffed with highly risky and lowly rated debt securities. The Beirut Stock Exchange on the other hand, witnessed a drop by half in its market capitalization, and it became virtually impossible for any Lebanese institution to carry out an initial public offering or issue GDRs internationally. Moreover, the privatization window of opportunity of the mid 1990s period had clearly been missed, as politicians decided to kick-start the privatization program too late, towards 1999. This program is yet to really take off, and one of the privatization methods, which consists of selling shares of the privatized entity to the public via the domestic capital markets, is clearly out of the question for the time being, partly due to a lack of demand by local and international investors and partly because of a weak domestic infrastructure.
Another reason for the short life of the Lebanese capital markets has been the lack of interest by international investment banks for the Lebanese market. Lebanon is judged to be too small and too risky by international investment bankers and investors alike, and there is little hope that any global investment banking group would take interest and invest in the necessary resources for the development of the Lebanese capital markets. When companies such as Merrill Lynch, Citigroup, or Deutsche Bank act as bond book-runners for more than 300 to 500 issues each for total amounts exceeding $150 billion, in an international bond market exceeding $2 trillion (as at the end of 2003), the Lebanese market is obviously insignificant and simply not worth the hassle or investment banker’s time.
A developed and well-regulated domestic capital market environment is crucial if Lebanon is to come out of its economic inertia. The rate of national savings would also increase significantly and the development of debt capital markets would definitely provide a savings alternative to the population. For the capital markets to take off in Lebanon, domestic commercial banks need to take their self-assumed “universal banking” role much more seriously, as they are the only financial institutions in Lebanon to have the necessary financial resources to develop strong investment banking and capital markets capabilities. These banks must start showing greater flexibility in their dealing with their corporate clientele and suggest bond or equity issues when appropriate. Advisory services within the banks should be developed, not only for the development of primary and secondary securities issues, but also for the establishment of a wide institutional and retail investor base on a domestic basis.
It will not be sufficient for banks to convince a company to issue bonds or stocks. A solid and efficient secondary trading market must be established by at least the ten largest banks in the country, which would also have to develop a professional and transparent research capability. A domestic rating agency may even need to be set up, as ratings play a catalytic role in the development of capital markets and are vital for the initial pricing of primary bond or other debt securities issues. The local banks and insurance companies will have to work hand in hand to accomplish the important task of setting up a series of mutual, pension, venture capital, and other types of funds, which, under any circumstances, constitute the core of any investor base.
Simultaneously, the privatization program must resume in a transparent and highly proclaimed way, with the government making it clear to the public that every significant privatization will include a regional and domestic initial public offering. It will be indeed crucial for the development of local equity capital markets to list the newly privatized institutions on the Beirut Stock Exchange (BSE). The latter would, in this way, see its market capitalization increase substantially, and, thanks to active market making, secondary trading and research by the local banks, would become an interesting investment alternative once again.
The government would also have a role to play. For a start, it can announce a major securitization program for its government institutions. Securitization is the most efficient restructuring tool, which has been widely used by other governments prior to launching their own privatization programs (Greece carried out more than €10 billion worth of securitization transactions in the last few years). It is a way of getting financed more cheaply, by issuing debt securities, which would be secured by the cash flow ability or collateral value of a specified asset or pool of assets. For example, the Lebanese government tried recently to securitize tobacco customs’ duties. The aim was to issue debt securities, which principal and interest rate would be assured by the cash flow emanating from the payment of customs’ duties over a ten year period. Such a transaction never got off the ground for political reasons, and also because few people understood its meaning and realized its long-term benefits.
It is vital that Lebanon does not follow the trend of many Asian economies in the late 1990s, when the reasons for the market collapses of 1998 were attributed to the absence of a developed domestic debt capital market. Indeed, when Asian shares (mainly of banks) collapsed, and simultaneously, bank deposits became unsafe, retail investors and savings could not fall back on any other alternative source of liquid investment. Hong Kong was the rare Asian country to have survived the crisis, thanks to its developed local debt capital markets.
Lebanon needs to embark on capital markets reforms, which should be carried out with a high degree of conviction and vigor. The development of the debt capital markets means the creation of an entire financial sector, including the establishment of a long-overdue capital markets authority, which would boost national growth through the more fluid financing of both the private and public sectors.
The development of investment banking activities by local banks, a privatization take-off, and the launch by the government of a securitization program, are essential components of a capital markets development trend. Well-regulated and developed capital markets would inject life in a moribund economy and avoid ultimate catastrophe. Their development must be considered as a priority.