Focus: Capital Markets

Opening Up

Nov. 8, 2017

With trading volumes up 60% despite volatile oil prices, the Beirut Stock Exchange (BSE) is coming to terms with its long-stated goal to be privatized. The plans are now in the government's hands and things seem to be moving.

Lebanon's stock exchange, the BSE, looks on the verge of privatization following the ending of a political stalemate. After months of impasse, Michel Aoun was elected president in October 2016, his government took charge in January 2017, and in June parliament approved a law for electoral revision that will allow the Lebanese people to vote for their parliamentary representatives for the first time since 2009. This has meant that other issues could finally start to be addressed, and, not least Lebanon's sluggish capital markets sector.

According to BSE, the final version of the articles of association of the new company, to be formed under the BSE banner in conjunction with the Capital Market Authority, for the privatization of the stock exchange has already been drafted and submitted to the Ministry of Finance, which has made remarks and is evaluating the proposal.

Once the Council of Ministers approves the article of association and appoints a board of directors of the new stock exchange, the process of transforming the current official bourse into a joint stock company will start. The new board of the stock exchange will work within one year to privatize the BSE by drafting the rules of privatization. It is unclear, however, what shape this new BSE will take. Financial market laws in Lebanon do not specify what structure a privatized stock exchange should follow, neither does it clarify if the state may choose to hold on to a golden share of the venture.

Talking to TBY, Ghaleb Mahmassani, acting president at BSE, stated that once privatized, BSE, “will be more business oriented and promote itself and act more vigorously to support its business." He warns, however, that “the privatization of the stock exchange by itself is not the only step necessary to promote and develop the financial market in Lebanon," and what is needed, “is a series of steps that should be done harmoniously in order to change the culture of Lebanese businessmen and the public in general."

Strong performance

While several challenges in Lebanon and the region have affected economic performance, the BSE showed positive results at the end of 2016. Cumulative trading during 2016 totaled 120.5 million shares valued at USD971.6 million, compared to 74.6 million shares for a value of USD628.9 million for the year 2015. This translates into an increase of 62 and 55%, respectively on the volume and value of shares traded.
The stabilization of the political situation had a positive impact on BSE's performance altogether. After recording losses over most of 2016, with a 2.1% crunch on its market capitalization to USD11.1 million in the months running up to September, June 2017 figures reveal a market capitalization climb up to USD11.53 million. Total market value also showed healthy growth as it soared from a 2016 year high of USD1.18 million to 1.4 million by mid-2017.

The impact of the elections was clearly stated in the BLOM Stock Index in late October, which rallied up to 1,214, a 3.86% rise since the beginning of the year, and a level of activity BSE had not seen since 2008. In June 2017, the BLOM Index has subsided to 1,150.

Despite the positive signs, BSE remains one of the smallest stock exchanges in the region, only outdoing Tunisia's bourse. This happens partially because the Lebanese market is dominated by a strong banking sector, “14 to 15 times larger that the capital market," Dr. Fadi Khalaf, Secretary General of Arab Federation of Exchanges (AFE), told TBY, which actively competes against BSE. Due to the nature of the economic fabric of Lebanon, most ventures remain family-owned SMEs, which have easy access to credit within the banking sector. “The banking sector has long been the main pillar of the Lebanese economy and there is no fair competitiveness between these two sectors," and “this status quo is unlikely to change," Khalaf predicts.
In fact, the banking sector represents the vast majority of the companies listed on the BSE. Eight of the 11 companies trading in Beirut are financial institutions, the remainder working in the construction business. The expectation is that the privatization of the BSE will allow smaller companies to be floated in the stock market, creating momentum for greater market capitalization and the expansion of trade volumes, which in turn should attract more investor interest. So far, the family-owned structure of the SMEs represents an impediment, as a corporate structure and culture has to be developed for these companies to gain benefit from access to capital markets. Industry experts suggest that up to 40 companies have shown interest in entering BSE once the privatization process is concluded.

For this shift to gain traction, however, a set of incentives will be needed to promote the floating of these companies. The BSE Committee is already trying to increase awareness about the importance of capital markets by giving attention to educational and promotional programs that aim to attract and convince medium-sized Lebanese companies to be listed on the BSE and to increase their capital through the broadening of the shareholder's base. However, Khalaf suggests the process can also be driven by the “governments themselves through sovereign funds or savings to encourage other investors to invest in several sectors. Countries should first encourage the creation of new companies and prepare the listing of SMEs among specific rules and regulations."

Foreign Threats

Growth in 2017 has been positively affected by the end of the political deadlock in late 2016, but has also benefited from the stabilization of the prices of crude oil, which created a lot of uncertainty in the region throughout 2016.

“In 2016 we saw a lot of fluctuation in oil prices, which affected the Gulf countries, and when the Gulf countries' stock exchanges are affected, there is a knock-on effect on the other exchanges in the region," Khalaf told TBY.

The price of crude oil in the international market took a cliff-dive in June 2014, when it went from over USD110 per barrel, reaching the bottom of the trough at less than USD30 per barrel in January 2016, bringing a lot of instability to oil-dominated economies in the Gulf, and impacting the whole region, including Lebanon, driving investment away. In Khalaf's words, “this volatility unsurprisingly impacted liquidity in the region," but “looking ahead to 2017, we are expecting more stable oil prices, between USD50 and USD60 (per barrel), which, compared to the previous fluctuations, is very welcome."

Saudi Arabia, as one of the biggest economies in the region, is taking the lead on trying to restore confidence in the markets, particularly in the run-up to history's largest IPO, the privatization of 5% of national oil company Saudi Aramco, scheduled for 2018. However, this development has found mixed reactions among investors. “Saudi Arabia is doing a lot this year in opening the Saudi market, which optimists say will positively impact the region by drawing in more international investors to the wider region," while “others say it will attract all the attention to the Saudi market and detract from the other exchanges. Either way, we expect a positive year with more liquidity in the region," Khalaf concluded.