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Weathering economic crisis - new book sheds light on keys to success

Weathering economic crisis - new book sheds light on keys to success - Market crash of late 1990s suggests how to strengthen resilience

The collapse of emerging markets in 1997 and 1998 was a rude awakening for governments and investors in Asia, South America and Russia.
Stocks tumbled to all-time lows and many leading banks either collapsed or suffered huge losses. National economies of these countries also suffered as a result of the crisis.

Lebanon was one of the few countries that weathered the emerging markets crisis, despite the country’s dormant stock exchange and deep budget deficit. Drawing lessons from this period seemed very important to all brokers, investors and regulators, who are keen to strengthen the Lebanese capital market.

One of those eager to shed light on this important development was Marwan Barakat, the head of research at Banque Audi. Barakat released a book a few days ago entitled The Fall of Emerging Markets: Fundamental Analysis and Lessons for Lebanon. This valuable book was based on Barakat’s doctoral research at the University of Leeds in England.

The author, who has written numerous research papers on Lebanon, painstakingly reviewed and examined the ups and downs of emerging markets in Latin America, East Asia and Eastern Europe and compared them to the Lebanese model.

The objective of Barakat’s book was to provide appropriate policy recommendations to strengthen Lebanon’s resilience to international turmoil.

Barakat argued that the Lebanese market owed its resilience to a combination of macroeconomics, market and financial industry circumstances.

Citing an example, Barakat noted that the relative resilience of the Lebanese economy was mainly witnessed at the capital market level with limited widening spreads on Eurobonds, declining interest rates on Treasury bills and a stable exchange rate. “Resilience was also observed, though less significantly, in the stock market and the global depository receipts,” Barakat said.

The Beirut Stock Exchange is considered one of the sleepiest in the Middle East. It has a market capitalization of about $1.4 billion, but trading in the Beirut Stock Exchange (BSE) is relatively low despite the solid profits of listed banks.

The author drew comparison between debt and gross domestic product, comparing Lebanon to other highly indebted countries, such as Brazil and Argentina.

At the end of this year, debt to GDP stood at 175 percent in Lebanon, compared with 73 percent in Russia and 50.3 percent in Argentina. “Lebanon’s debt, deficit, and debt servicing ratios bear witness to much larger public finance imbalances than those of Russia and Argentina on the eve of their large market crisis, in 1998 and 2001 respectively,” Barakat said.

But Barakat stressed that one of Lebanon’s main advantages is that the bulk of its debt is held by Lebanese banks and institutions in both local and foreign currencies.

In contrast, Argentina seems at the mercy of international creditors, who hold most of the debt. Reducing the high public debt has become the top priority of all successive governments.

The government of Prime Minister Rafik Hariri hopes that privatization will reduce the public debt. But continuous bickering among political leaders has delayed this process.

Drawing a balance of the strengths and weaknesses of the Lebanese market and economy, Barakat warned that the Lebanese resilience to the crisis cannot last if imminent structural reforms are not adopted soon, to avoid a hard landing scenario. The book is one of the few comprehensive pieces of research that deserves the attention of serious economists and financial experts, not only in Lebanon but worldwide.

Beirut,06 10 2003
Osama Habib
The Daily Star
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