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French Version

'Financial Markets Council can provide investor protection'

Banque Audi Saradar Group released its 4th quarter report on Lebanon, which highlights main economic and financial indicators in 2005. The Daily Star is publishing the conclusion of the report.

While awaiting the "Beirut I" conference for Lebanon, it is important to reiterate the significance of such a conference for the long awaited structural adjustment of Lebanon's economic imbalances in general and its public finances in particular.

We believe beyond the significance of the targeted international assistance for Lebanon, the most important is the domestic adjustment plan that would be presented to the conference, as such a program has the most significant leverage effect on the country's soft landing at large.

The wide potential at the level of growth-oriented measures, privatization, securitization, debt restructuring, improving resource mobilization and rationalizing public expenditures is actually more important, in terms of its impact on vulnerability indicators, mainly debt to GDP, than any foreign assistance expected to be raised in the conference itself.

We actually believe there is a potential for public debt to GDP to decrease by 40 percent to 50 percent in a five-year horizon in case ambitious but plausible adjustment measures are implemented. Such a forecast can be easily generated by a containment of public expenditures by around 5 percent of GDP, and an increase in the revenues to GDP ratio by 3 percent over the period, along with privatization proceeds and international aid, all within the context of a real GDP growth of 6 percent per annum.

At the private sector front, the assumption of an average real GDP growth rate of 6 percent per annum, within the hypothesis of a constant ratio of imports to aggregate demand, suggests a similar aggregate demand growth rate of 6 percent per annum in real terms, the equivalent of an 8.5 percent annual growth in nominal terms. Private investment remains key in the generation of the needed economic value added over the horizon period.

The economic growth objective rests on a consecutive rise in the private investment to GDP ratio to reach slightly below 30 percent at the 2010 horizon.

The enhancement of the private capital formation ratio rests on ensuring the adequate financing of the private investment aggregate over the covered period.

While historical self-financing ratios for private investment were so far extremely high (above 70 percent), the further development of capital markets intermediation after the enhanced market liquidity and efficiency recently observed and the expected strong growth in private sector lending in a rapid economic recovery era assumes the gradual decline in self financing to more normal and sustainable levels.

The capital markets development target benefits from the recent adjustment in the perception of domestic and regional investors, and most recently international investors, as to the markets' medium to long-term prospects. The overall investment framework seems to be found interesting relative to the risk premium involved and the potential future returns offered on investment, especially in the assumption structural imbalances are apt to be gradually reduced. The significant increase in the Lebanese stock market price index in the year 2005 is among the market signals for this change in capital markets' investor expectations.

Beyond the adjustment in share prices, the improved turnover level in a market characterized for long by a large liquidity and efficiency gap, might give encouraging signals to potential issuers apt to list their stocks on the Lebanese equity market. The weak capital markets liquidity was one of the main problems that kept private issuers from resorting to Lebanon's capital markets for potential listing and capital raising. The rise in market turnover by more than four times in 2005 relative to 2004, is an indication of a partial recapturing of the market's lost liquidity and efficiency. Still, with an annual turnover to market capitalization of below 15 percent, against a regional average of 74 percent, the Lebanese market continues to suffer from a lack of liquidity at large.

The preparation of a well-defined market regulatory framework, with vigor given to the equity market in Lebanon through the foreseen enactment of a Financial Markets' Council Law should help provide the needed impetus to market activity at large.

An independent Financial Markets Council, performing the activity of a Security Exchange Commission, whose governing law is currently being finalized, would undeniably ensure optimal protection to investors and the financial markets at large. Its tasks (today partly covered by BDL and BSE) would be to study the files of the companies seeking for listings, give approval to investment funds wishing to be traded, supervise the relationship between brokers, financial institutions and clients, and finally ensure that no type of illegal insider trading is taking place.

The further development of Lebanon's capital markets carries strategic importance in the domestic saving investment process, in the channeling of the flows of foreign capital toward Lebanon and in the repatriation of Lebanese off-shore capital. Such an enhancement would help develop major sectors of the economy and finance post-reconstruction recovery, restructure existing finance (mergers & acquisitions, securitization, privatization), and develop Lebanon's role as a regional international financial center. The favorable overall business environment and investment incentives, within the context of improving macroeconomic performance, reinforce Lebanon's position as an attractive venue for private domestic and foreign investment.

Beirut 06-03-2006
The Daily Star

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