|Road map to Lebanon's Eurobond market goal|
|Lebanon's historical role as a financial center for the region could become a reality once again. Although Lebanon's financial system has been traditionally dominated by conventional banking activities, nonbanking financial alternatives are starting to develop. Specifically, the enhancement of Lebanon's capital markets, coupled with Lebanese expertise in bond issues, could position Lebanon highly among its peers as a regional fixed-income product provider, particularly Eurobonds.
Indeed, with its extensive expertise in structuring large Eurobonds and other fixed income transactions, Lebanon could potentially become the regional leader in Eurobond issuances.
Since 1994, Lebanon has issued over $21 billion worth of Eurobonds, compared to $1.5 billion of total issuances for Egypt and $250 million for Bahrain, making Lebanon the largest Arab sovereign issuer in the international bond markets. The issuance of sovereign Lebanese Eurobonds, which is managed by the Finance Ministry in partnership with international and local investment banks, is conducted transparently through regular market channels and has attracted a large base of subscribers. Additionally, Lebanon enjoys relative stability in the performance of the Lebanese Eurobonds on the secondary market. This positive environment and established market presence serves as a solid platform from which Lebanon can capitalize on its expertise in the process of issuing Eurobonds - starting from origination, management, marketing, placement, and finally trading of the Eurobonds. Issuers from the region can benefit from the Lebanese platform to raise funds and issue their own Eurobonds. This is applicable to sovereign and private sector issuers from the region, including Gulf countries, who also may be interested in structuring Islamic products. In fact, Lebanon has previously structured an Islamic Sukuk transaction, preparing it for the current advent of the Islamic Sukuk market that is expected to grow in terms of transaction volume in the coming years.
With a total size of assets under management in the Lebanese banking system exceeding 334 percent of GDP, local investors, mainly banks, have played a central role in the development and enhancement of the country's fixed income markets. In addition to serving as the primary investors in Lebanese fixed income products, Lebanese banks have developed an expertise in trading the Lebanese Eurobonds. Furthermore, they have for the first time been granted the opportunity to team up with international investment houses in order to structure a sovereign Eurobond transaction, increasing their skill base to areas including origination, syndication, and underwriting of Eurobond issues. In the coming months, this trend of involving local banks in managing Eurobond issues is expected to continue. Moreover, Lebanese banks have been recently authorized by the Central Bank to diversify their holdings by investing in BBB+ securities, which will allow them to trade and make market on Eurobonds and other products issued by regional players. These banks also enjoy a high penetration rate in the region, allowing Lebanon to capitalize on its presence in countries from the region, and to market its products to a wider investor base.
The market infrastructure available for Lebanon's fixed income products is already strongly developed. This is particularly true for the central depository, settlement and clearing agency, MidClear, which has so far ensured an efficient and smooth handling of transactions through its links with various international clearing houses. The Beirut Stock Exchange (BSE) has also been an integral part of the various transactions, and has recently enhanced its role through the listing of 10 Eurobonds of the Lebanese Republic and its participation in the execution of the country's $1.2 billion exchange transaction in September of 2004.
In an effort to realize Lebanon's financial development potential, significant effort has been deployed to modernize domestic capital markets. This is taking place through the establishment of a capital market authority that would be responsible for protecting investor's interests from moral hazard and ensuring the proper functioning of markets through adequate regulation and supervision (The UNDP project at the Finance Ministry is working with a team of experts through a technical-assistance grant by the First Initiative on the establishment of a regulatory body that will enhance the development of capital markets in Lebanon).
Particularly, the initiative is aimed at promoting stability and safety in the financial markets and maintaining confidence in the financial system. The Capital Market Law that would establish this authority is being drafted and is expected to be passed before the Council of Ministers by early 2005.
Additionally, the commitment of the financial authorities to create an environment conducive for capital markets development has materialized in an enhanced dialogue with market participants. Workshops on security market development, specifically the promotion of institutional investors and the enhancement of secondary market activity, were conducted, with the active participation and involvement of field experts.
Enhancing Lebanon's financial markets would undoubtedly be beneficial to the economy at large. Increased trading activity would improve liquidity in the secondary markets and would lead to an enhancement in pricing efficiency. In addition to boosting the performance of the BSE, increased activity would also contribute to strengthening the investment banking industry in the country - deepening the market. At the institutional level, a consolidation of financial market activities would improve information dissemination in all areas including information on public debt and financial markets.
On a separate note, the recent strategy followed by other countries to become regional financial market players, such as Bahrain, which has gained experience in structuring Islamic Sukuks, and Dubai, which is preparing for the opening of the Dubai International Financial Center, is complimentary and relevant to Lebanon's market development objectives. By serving as a regional gateway for the issuance of bonds and the facilitation of financing, Lebanon can provide a useful niche of fixed income products to investors in the region.
Jihad Azour is UNDP project director at the Finance Ministry. The opinions expressed above are the author's and do not necessarily represent those of the Finance Ministry or UNDP
Beirut,12 27 2004
The Daily Star