MAKING A MARKET

Lebanon 2016 | FINANCE | REVIEW: CAPITAL MARKETS

Lebanon's underdeveloped capital markets are in the process of undergoing changes aimed at increasing access and activity.

Established in 1920 by decree of the French Commissioner, the Beirut Stock Exchange (BSE) is the second-oldest in the region. Like the banking sector, it has weathered a great deal of political turmoil over the years, including suspending activity from 1983-1996 due to the Lebanese civil war. Since it resumed activity, it has sought to regain its historical place as one of the region's economic drivers. In recent years, it has undergone a number of technological and structural changes to further standardize and develop what will hopefully become a mainstay. In the past decade, it has updated its trading systems to the NSC UNIX V3 PLUS, implemented a remote trading system, and started the process of a shift to private ownership. Even with these new innovations, the BSE faces a difficult road ahead, as a slumping economy and entrenched cultural and political obstacles continue to be barriers to success. Still, changes aimed at increasing participation in capital markets suggest that the BSE could soon become a bigger regional player.

In August 2011, the Lebanese Parliament passed a new Financial Markets Law that created the Capital Markets Authority (CMA), endowed with the ability to regulate Lebanese capital markets, and a Financial Market Court able to adjudicate financial markets. The law also includes provisions for the stock market to transfer to private ownership. This process has taken some time, but Firas Safieddine, Vice Chairman of the Capital Markets Authority, is optimistic that it is finally coming to a head. “The government decided to move forward on the much-delayed privatization process of the BSE," Safieddine told TBY. “Should the cabinet approve this within a month as we expect it to, we should have a new board for the BSE with new functions to ensure that the transfer of the existing stock exchange to the new stock exchange is smooth and without major obstacles when moving forward with the privatization process. As members of the newly formed transitional stock exchange board, the CMA will closely cooperate on due diligence efforts, evaluation, the RFP, and overseeing the bidding for privatization." The shift to private ownership would be a strong indicator to international investors that the BSE is serious about its desire to become a larger and more significant part of the Lebanese economy.

As of September 2016, the market capitalization of the BSE's listed companies stood at USD11.1 million, down from USD11.22 million at the end of 2015. Total value of the market was USD1.13 million, down from a yearly high of USD1.18 million in April. The BSE's performance was negative in the first half of 2016, with the BLOM Stock Index recording a 1.69% decline to 1,149.79 points before a small rally in September took it back up to 1,157.49. This came on the heels of an uneven 210 that saw the BLOM BSE Index hit an 11-month high of 1,229.34 in March, then drop all the way to 1,108.49 in November. In comparison, the BSE's 2016 performance was less remarkable but important in taking the first steps to regain investor confidence.

One of the biggest issues facing the BSE in its quest for growth and development is Lebanon's business culture. According to a 2015 Blom Bank report, almost 95% of enterprises in Lebanon are SMEs. These firms, while productive and important of the Lebanese economy, are often averse to the stringent transparency and financial disclosure requirements that come with a listing on the stock exchange. The BSE requires minimum capital of USD3 million for listing on the official market and USD1 million on the secondary market. Combine this with a strong commercial lending sector, and these family-owned businesses have little incentive to look to capital markets for funding. “Lebanese businesses are, in their vast majority, small family-owned firms that prefer to finance their activities through bank credit in order to keep control over their companies," Beirut Stock Exchange President Dr. Ghaleb Mahmassani told TBY. "These companies do not see the advantages of being listed on the stock exchange." As a result, the BSE is the region's second-smallest stock exchange as measured by market capitalization, ahead of only Tunisia. To improve the market environment, the CMA is preparing a new Electronic Trading Platform (ETP) for SMEs. This new platform could possibly offer SMEs an alternative to the elevated startup costs of the sector's traditional path. Moreover, the CMA has introduced new regulation aimed at streamline the process of establishing financial intermediaries. “Our new regulations have dissected the activities of capital markets into five categories: dealing, managing, advising, custody, and arranging," Safieddine told TBY. “We are confident that this will create an infrastructure of focused professional financial institutions that could help increase the appetite of local firms to trade and list on the BSE. I am also confident that this new procedure will attract many of the high caliber Lebanese diaspora financial professionals to set up base back in the country."

The limited expansion of capital markets is evidenced by the fact that the overwhelming majority of traded value on the market comes from banking firms. The banking sector accounted for 89.12% of all shares traded, 85.82% of total traded value, and 80.6% of market capitalization in 2015, a reflection both of the sector's importance in the Lebanese economy and the low volume of trading on the exchange. In contrast, the real estate sector accounted for only 16.27% of market capitalization, the industrial sector 2.82%, and the retail sector only 0.04% of total traded value. It is no surprise, then, that Dr. Mahmassani says, “Diversifying the structure of listed companies on the Beirut Stock Exchange is one of the biggest challenges the stock market has been facing since its reopening… We are trying to correct the current situation by giving increasing attention to educational and promotional programs that aim to attract and convince medium sized Lebanese companies to list their shares on the BSE and to increase their capital through the broadening of the shareholders base by highlighting the importance and advantages of financing through the stock exchange."
All indications are that the CMA is serious about its desire to take the measures needed to strengthen Lebanon's capital markets. “Globally, research has estimated that the stock market growth and the long-term real growth rate in GDP is a one-to-one relationship," Safieddine told TBY. “Through a successful usage of the stock exchange we can achieve a reduction in the government's debt-to-GDP ratio from 140% to a more acceptable figure." With strong government leadership and a commitment to long-term vision, Lebanon's capital markets look ready to become a major economic driver for both the country and the region.