Parliament has passed long-stalled legislation aimed at strengthening the regulatory framework for the country's capital markets, increasing transparency and bolstering confidence in the financial sector, though it may take time for the full impact of these reforms to be felt.
In early August the parliament ratified draft legislation laying out the roles and responsibilities of the National Council for Financial Markets in Lebanon, an oversight agency that will be tasked with updating regulations, implementing reforms and paving the way for the planned privatisation of the Beirut Stock Exchange (BSE).
The regulatory committee will be granted a high level of autonomy in setting its policies, playing a role similar to that of the US Securities and Exchange Commission, according to a statement issued by Banque du Liban (BDL), the central bank, under which the body will be established.
It will have seven members, five of whom will be from the private sector, with the head of the BDL, Riad Salameh, acting as its chairman. Yassin Jaber, a parliamentary deputy for the Amal Movement and a former economy minister, said the legislation was a significant step towards revitalising Lebanon's capital markets.
"At last Lebanon will have a vibrant capital market that will be supervised by an independent watchdog that will be headed by central bank governor Riad Salameh," Jaber said in an interview with local media the day after the parliamentary vote.
Parliament also passed a draft law tightening regulations dealing with insider trading, which should help instil greater faith in the markets. Analysts said this step, along with the other reforms, would increase transparency in the markets, though doing so could take time.
Economist Ghazi Wazni said the new legislation would "boost confidence, leading to an increase in market capitalisation and the number of shareholders", though he added a note of caution, telling local media that the effects would be felt only in the medium to long term.
How soon that will happen will depend to a degree on when the committee itself is formed. It took five years for the legislation to make its way to the floor of the parliament, with the draft law having been tweaked a number of times to update it during its wait to be tabled for a vote. Having passed the reforms into law, it is hoped momentum is not lost when it comes to establishing the panel.
Once it does become operational, Salameh foresees the committee having a busy time ahead of it. In an August interview, Salameh said that establishing measures to promote confidence in potential listed companies was a top priority. "You have to put in place a clear, transparent basis for the accounting of the companies that want to go public, so that the people buying into them are sure that the value of their money is protected," he said.
Added to that was the requirement of creating more liquidity, through steps aimed at introducing more participants into the stock exchange, such as investment banks, and to address the issue of insider trading so as to provide protection to the smaller trader on the exchange, he said.
While the reinforced regulatory regime will help build confidence in the markets, the uncertainty stemming from on-going political instability will continue to cause both foreign and domestic investors to approach the BSE with hesitation. In a research paper issued in mid-August, Audi Bank said Lebanon's capital markets had been adversely affected by domestic and regional concerns during the first half of the year and beyond, with bond and equity prices down and a relatively low BSE turnover ratio.
"The stock market price index dropped by 11% over the first half in a market that still lacks efficiency and liquidity, while bond spreads expanded by 91 basis points amid foreign sell offs and domestic buying," the report said.
This sluggish performance could continue for some time, according to Louis Hobeika, an economist and professor at Notre Dame University. "I do not see any reason for Beirut stocks to rise. It is only normal for them to be down given the domestic political situation, the deteriorating situation in Syria, and also with the global market turmoil," he told media in late August.
While the establishment of the National Council for Financial Markets in Lebanon and the setting out of its role and responsibilities is a major step forward, it will take time for the committee to decide what further reforms are necessary and then enact them. Once it is up and running, however, Lebanon's capital markets will likely attract increasing investor interest.
© Oxford Business Group 2011
