“The banking secrecy of the past must come to an end,” said British Prime Minister Gordon Brown at a press conference marking the end of the G-20 summit in London on April 2. “We are engaging in a deep process of restructuring our financial system for the future.”

The following day newspapers around the world headlined Brown’s end-to-bank-secrecy quote, which no doubt pleased the average reader who blames the international financial sector for the current global crisis.

Lebanon continues to uphold strict bank secrecy laws, and the news raised questions as to what extent the G-20 meant business and how the decision may affect the country’s key banking sector.

The United States (US) and several European Union (EU) states in recent months have pressured traditional banking centers such as Switzerland and Liechtenstein to relax banking secrecy laws following a series of financial scandals.

Beirut goes only so far

“The banking secrecy in this country is not designed to hide illegal money,” Lebanon’s Economy and Trade Minister, Mohammad Safadi, said at an April conference in Beirut. “What has been happening in the world is that tax evasion is becoming a major issue in the United States and Germany in particular. Our laws are clear: we are willing to cooperate on money laundering issues but not on anything else.”

Dr. Makram Sadr, secretary general of the Association of Lebanese Banks, agreed that the current problems between the EU, the US and Switzerland have mainly to do with matters of tax evasion, or financial transactions related to criminal terrorist activities. According to Sadr, the G-20’s call to end bank secrecy should be seen strictly in that context.

“We are not a tax haven, we are not like Jersey,” Sadr said. “We have no offshore banks or financial institutions, and we have no intention of becoming a tax haven, so we are not really targeted by the G-20 decision.”

According to Sadr’s bank association, the Lebanese banking sector consists of 55 active commercial banks and 12 specialized banks. It employs more than 17,000 people in 872 branches, and manages the equivalent of $90 billion in assets. Foreign banks have 11 branches in Lebanon or hold equity stakes in local banks.

The ultimatum

The final G-20 communiqué calls upon the international community to take action against “non-cooperative jurisdictions,” including tax havens: “We stand ready to deploy sanctions to protect our public finances and financial systems,” the communiqué reads. “The era of banking secrecy is over. We note that the Organization for Economic Co-operation and Development (OECD) has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information.”

On April 2, the OECD published a report on the progress tax havens have made in implementing the international agreement that standardizes the exchange of tax information.

The report essentially distinguishes between tax havens that have signed and implemented the standard, countries that have signed, those who have not yet implemented it, and countries that have done none of the above.

The four blacklisted culprits — Malaysia, Costa Rica, the Philippines and Venezuela — signed up soon after the report’s publication and now feature on the so-called grey list: countries that signed, but did not implement the international standard. Lebanon, nor any other Arab country, is included on the list.

“The G-20’s call for bank secrecy does not target Lebanon, as Lebanon is not mentioned on the OECD list,” said a senior source at the Lebanese Central Bank. “In addition, Lebanon will not be targeted as it has adopted Law 318.”

In April 2001, the Lebanese parliament passed Law 318 which criminalizes money laundering and established the Special Investigation Unit (SIC), an independent legal entity within Lebanon’s Central Bank. The SIC has the exclusive right to lift banking secrecy upon request of international organizations such as Interpol, the US’s FBI or other foreign governments.

Lebanon’s was even praised by the International Monetary Fund (IMF) in March for the country’s “strict financial regulation and oversight that shielded banks from exposure to troubled international banks, structured products, and wholesale financial markets.”

The IMF did praise Lebanon again in the fund’s latest report issued on April 17. The report mentioned nothing about tackling the country’s bank secrecy laws.

It has to happen sooner or later. One of the financial world’s longest-running unrequited courtships appears to be heading for consummation this month. Turkey and the International Monetary Fund (IMF) have been through a series of flirtations and lovers’ tiffs since the dying months of 2008, when it became clear the Ankara economy was being dealt a pummeling as the financial system of the West fell apart.

Already saddled with an uncomfortably large budget deficit, Turkey’s problems began to accelerate as its exports slumped, especially exports of motor cars and consumer durables like fridges and washing machines. The numbers for the last quarter of 2008 and the first few months of this year make for grim reading. The overall economy shrank 6.2 percent between October and December as unemployment headed in the opposite direction, hitting just over 15 percent by the end of February. Concerns about refinancing foreign currency denominated loans were about the only other growth industry in 2009. 

…and then the politics

Meanwhile the government of the ruling Justice and Development Party (AKP) was also worried about other numbers. It was elected in 2007 with a popular vote of nearly 47 percent and wanted to consolidate its grip on power in the municipal elections at the end of March this year. An agreement with the IMF on renewing, or even increasing, the $10 billion facility that expired last May was contingent on cutting public spending and increasing tax revenues. That was the last thing the ruling party had on its mind as it tried to replicate its national election results in the local government vote. It was also, arguably, the biggest single reason why the on-off love affair with the IMF has been more off than on lately.

The local elections saw the AKP come out as a clear winner, with less than its previous national support, but still an overall 40 percent of the vote. However, it lost control of one municipality and failed to make inroads into opposition-held territory, despite some tough campaigning and distribution of voter incentives such as food and household appliances.

Now comes the day of reckoning: the only thing virtually certain about the new deal with the IMF is that it will take place. A three-year agreement is more likely than the previous 12-month arrangement, and the amount involved could range anywhere from twice the previous $10 billion to as much as $45 billion.

It seems probable that tax cuts earlier this year designed to stimulate the economy — not to mention increase the pre-election feel-good factor — will be reversed. The absence of a new IMF deal had also seen the Turkish lira slide in value to around TL1.80 to the US dollar, especially in light of recurrent cuts in the prime lending rate by the central bank. With the elections over and the prospects of an IMF facility on the horizon, the lira has recovered to around 1.60 at the time Executive went to press.

For all the criticism levelled at the AKP for delaying a decision to bite the economic bullet, probably the only ill effect has been a period of uncertainty for the past few months, in the markets, with the currency and also in the manufacturing sector.

Most of the factors buffeting the Turkish economy are externally driven. Exports are down because the European Union markets for Turkish-produced goods have collapsed. Refinancing debts is problematic because of the global liquidity squeeze. And certainly none of the other political parties have a growth track record that can match the AKP’s since it first came to power in 2002.

Perhaps the biggest lesson being learned is that the “moderate Islamism” attributed to the AKP has less to do with its popularity than widely thought, and is also less “dangerous” than claimed by those who equally say it is not all that moderate. Once the numbers started going against the AKP — rising unemployment and slumping production — so did some of its support. But then gratitude has never been a strong factor in the voter’s choice.

Peter Grimsditch is Executive’s Turkey correspondent

The biggest voluntary debt exchange outside the US was successfully completed by the Lebanese government in March when it “rolled over” $2.3 billion worth of foreign currency bonds. The government exchanged four dollar-denominated bonds maturing in 2009 for new dollar bonds maturing in March 2012 and March 2017.

The minimum yield guidance was set at 7.5 percent for the new March 2012 bond, and 9 percent for the new March 2017 bond.

The government also offered holders of its 2009 euro-denominated floating-rate notes an exchange for a tap of the existing 5.875 percent euro-denominated bonds due in April 2012, with the minimum yield set at 7.75 percent. The government selected three banks — Byblos Bank, Credit Libanais and Credit Suisse — to act as deal managers for the exchange offer.

The Ministry of Finance said the purpose of the debt exchange was “to proactively conduct liability management, increase the republic’s financial flexibility and extend its debt maturity profile.”

The international financial sector reacted positively to this voluntary exchange, as it is expected to improve the government’s ability to deal with the large public debt and reduce roll-over risk in the near term.

Moody’s Investor Service upgraded Lebanon’s local and foreign currency bond ratings to B2 from B3, respectively. Moody’s said the reason for this upgrade was the substantial improvement in external liquidity, the proven resistance of the public finances to shocks, and the willingness and ability of Lebanon’s resilient banking system to finance fiscal deficits.

“This exchange improves the structure of the government’s very large debt stock by extending its average maturity and reducing roll-over risk in the near term,” Tristan Cooper, a vice president-senior analyst in Moody’s Sovereign Risk Group, told the Middle East and North Africa Business Report.

Concurrently, Moody’s upgraded Lebanon’s country ceiling for foreign currency bank deposits to B2 from B3, while its country ceiling for foreign currency bonds has been raised to B1 from B2. Standard and Poor’s also raised the country’s credit rating from CCC+ to B-.

Although the voluntary debt exchange was seen positively by credit ratings agencies, the amount transferred is trivial in comparison with Lebanon’s $47 billion public debt. Lebanon’s credit rating is still six levels below investment grade.

Eurobond deal

Average participation rate

The Damascus Securities Exchange (DSE) launched in March had been a long time coming, like a financial version of the play “Waiting for Godot.” Year after year, articles would emerge in the press — this magazine included — that the DSE was slated for launch by year’s end.

Back in June 2007, Executive paid a visit to the future site of the bourse in Birzeh in northeastern Damascus, then housing the Syrian Commission on Financial Markets and Securities. The Commission’s plain gray concrete building looked like any other non-descript government structure in a Damascene suburb: the ubiquitous Syrian flag draped over the main doorway, security guards milling around, and badly lit interiors.

The room on the ground floor that was to become the trading floor resembled a small theater or cinema, with 50 odd, dusty, red felt seats facing a curtained stage. Such a gloomy interior did not look like the ideal location for the country’s first bourse since the 1960s. But the temporary home of the bourse has had a makeover.

The exterior has been stone clad to resemble the checkered shirts favored by many bankers; an electronic ticker shows trades over the main entrance, and up-market cars are parked along the surrounding streets. But it is the interior that is starkly different from two years ago.

Greeted upon arrival by a be-suited young Syrian lady, she was ready to give a tour and explain what the bourse was all about. But she didn’t need to go into the details as twice a week, on the two days the DSE is open, the public is treated to a lecture on the workings of the stock market — how to trade, what buys and sells are, bidding prices, percentage change and so on.

Some 60 people were sat on one side of the viewing area of the bourse, a mixture of both genders from their mid-twenties upwards, while a dozen sat in more plush chairs nestled amid flat screen computer monitors on the other side — the VIP section.

As the spokesman gave his presentation, he repeatedly turned to point at the digital trading board that dominates the back wall. To the immediate right of it, there is the only indication — other than the title of the DSE — that one is in Syria: the national flag attached to the wall and a small camera next to it. Curiously, the portrait of President Bashar al-Assad had been removed since the official launch on March 10.

Where the dirty work is done

The actual trading section consists of 18 cubicles set on a raised platform separated from the ‘audience’ by a waist-high glass wall. Five traders were at work, tapping into their computers, and by mid-morning a mere three trades had been made.

But that didn’t deter the apparent interest by the public, listening attentively to the presentation and asking questions.

Such interest reflects not only how the bourse has been received locally and internationally — notable as the first stock exchange to open since the global financial crisis — but also the long route the DSE has taken to open.

Syria has played it slow and cool in introducing such an economic platform to a population that is generally poorly informed about free market capitalism. After all, millions were stung in Saudi Arabia when the kingdom’s fledgling bourse dropped in value a few years ago. It caused a great deal of consternation among a public that had ill-conceived notions about what a stock market truly entailed: they realized too late that stocks don’t always go up, and that an emerging bourse is not always the best place for one’s life savings.

Listed companies and companies that have acquired initial approval for listing in the market

Companies that are expected to be listed in 2009

Indeed, the DSE is only in phase two of its development — the launch and building up of interest and trading levels. Phase three will be a more mature stage, as more companies list and the bourse moves to a purpose built location at Emaar’s $500 million Eighth Gate real estate development on the edge of the Syrian capital, slated for completion in mid-2010.

There are currently eight companies listed on the DSE (five of which are banks), three have initial approval for listing, and a further nine are slated to list this year, mainly banks, insurance and telecom companies.

“We could reach double the number of companies by the year end. If we get 14 companies listed, it will be quite good,” said Bassel Hamwi, general manager of Bank Audi Syria and deputy chairman of the DSE.

“The DSE has risen fairly well, but we won’t reach a point where it mirrors the economy itself — that is some way off. Total capitalization is less than one percent of Syria’s [gross domestic product],” he said.

Trading levels are also low as the DSE has set a daily cap of 2 percent for shares to rise or fall, while they cannot be bought or re-sold on the same trading day.

“I think the cap should be temporarily raised to 5-10 percent to have some activity,” said Jihad Yazigi, editor of financial publication The Syria Report. “The number of shareholders is also very limited, not tens of thousands but only in the thousands.”

The DSE clearly has potential, with pent up demand by companies to access capital, family owned companies to list, and privatization being mulled by the government. A clear indicator of such potential was evidenced over the past month by brokerage firms scrambling for licenses as the government had set a limit of 19. Currently only five are active.

“There are 19 brokerage firms, which is more than the number of firms listed on the DSE,” said Yazigi. “But the DSE is very low, so it can only go up. It is very symbolic of the efforts to liberalize the economy over the years.”