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1FransabankEconomic Bulletin • First Quarter 2011

• Executive Summary 2

• General Introduction 3

• Real Sector 3

• Public Finances 7

• Monetary Situation 8

• Financial Sector 9

• Foreign Sector 12

• Economic Prospects 13

Report - Lebanon's Economic Performance in Q1 2011

• Introduction

• Advancing Performance for Arab Capital Markets

• Improved Market Capitalization

• Individual Performance of Capital Markets

• Measures to Strengthen Corporate Governance

• Effects of International Crisis

• Required Restructuring

• Future Prospects

• Development of Beirut Stock Exchange

• Inter-Related Economic Developments

Study - Arab Capital Markets: Reforms for Further Developments

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Lebanon's Economic Performance in Q1 2011

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I. General Introduction

The Lebanese economy has recorded a relativeslowdown in its overall activity during the first quarter of2011 relative to the corresponding period last year.

This is indicated by the realized decline in severalindicators of the real sector, such as construction permits(-18.4%), number of tourists (-13%), number ofpassengers via the HIA (-5.1%), number of ships via Beirutport (-6%), customs receipts (-18.6%), hotel occupancy(-22%), and SMEs loans (-9.5%).

In parallel, inflation rose by 6.1% during the same period,coupled by a surging fiscal deficit (92%), net public debt(2.7%), and trade deficit (8.0%).

Also, the total trading volume at BSE fell down by 67%,coupled by lower capital inflows (-25.6%), and a deficit ofUSD 399 million in the balance of payments.

On the other hand, the Central Bank of Lebanon foreign-currency denominated assets increased by 1% toUSD 30.4 billion at end-March 2011, and consolidated assetsof the banking sector grew by 10.50% to USD 132.5 billionduring the same period.

The IMF forecasts real GDP growth of Lebanon at nearly2.5% in 2011, coupled by a forecast of the Arab LaborOrganization for unemployment at 12%.

The Institute of International Finance (IIF) projected thatthe current situation will certainly negatively affecttourism activity and incoming Foreign Direct Investment(FDI) in 2011. It forecasted that tourism activity to fellfrom 8.2% of GDP in 2010 to 7.8% of GDP in 2011. FDI willalso decline from 13% of GDP in 2010 to 7.2% in 2011.

Further, IIF estimated that the fiscal deficit will be widenedto 9.5% of GDP in 2011, as compared to 7.5% of GDP in2010, due to weaker tax revenues and the tax cut ongasoline and fuels.

However, there is a great confidence in the stability of thebanking system and the Central Bank of Lebanon FX reservesof USD 30 billion and its gold reserves of USD 13.5 billion,which might encourage foreign investors to resume theirinvestment activity in the Lebanese market.

II. Real Sector

1. Construction and Real Estate

Based on the figures released by the Order of Engineersof Beirut and Tripoli, the construction permits totaled3.1 million square meters in the first quarter of 2011, a decrease of 18.4% from 3.8 million square meters inthe same period of the previous year. Mount Lebanonaccounted for 49.7% of the total construction permits,followed by South Lebanon with 17.4%, North Lebanonwith 16.6%, Bekaa with 8.2%, and the Beirut with 8.1%.

The number of sales transactions has increased by 18.2%,to reach an amount of 3,926 transactions in the firstquarter of 2011, as compared to 3,322 transactions in thesame period of 2010.

FransabankEconomic Bulletin • First Quarter 2011

Executive Summary

The Lebanese economy has recorded a slowdown in the first quarter of 2011 relative to thesame period of 2010, due to the internal political conflict, which dominated during March 2011,and the regional turmoil in several Arab countries. Lebanon's major economic indicators arepresented in the following:

• Construction permits decreased by 18.4%.

• Number of real-estate sales transactions increased by 18.2%.

• The number of tourists decreased by 13%.

• The number of passengers at the Hariri International Airport (HIA) decreased by 5.1%.

• The amount of cleared checks increased by 0.4%.

• Fiscal deficit increased by 92%.

• Net public debt increased by 2.7%.

• Inflation rose by 6.1%.

• The Central Bank of Lebanon gross FX assets increased by 1% to USD 30.4 billion.

• The banking sector's total assets grew by 10.50% to USD 132.5 billion.

• Market capitalization of BSE fell by 9% to USD 12.1 billion.

• The trade deficit widened by 8.0%.

• Capital inflows dropped by 25.6% to USD 3.22 billion.

• The balance of payments recorded a deficit of USD 399 million.

• Economic growth is forecasted at 2.5% in 2011 according to the IMF.

REPORT STUDY REPORT STUDY


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54

from Saudi Arabia with 12.6%, France with 9.4% andKuwait with 8.3%.

The total number of flights reached 14,360 in the firstquarter of 2011, decreased by 1.3% year-on-year. The totalcargo processed in the first quarter of 2011 decreased by14.24% as compared to the same period of 2010, to reach15,769 thousands of tons.

compared to the same period of 2010, to reachUSD 16.97 billion in the first quarter of 2011. The value ofcleared checks in Lebanese pounds rose by 13.6% to theequivalent of USD 3.67 billion, while the value of clearedchecks in foreign currencies declined by 2.8% toUSD 13.30 billion. The dollarization rate of cleared checksdropped from 80.2% to 78.3% year-on-year.

7. Hotel Occupancy

According to the survey conducted by Middle-East HotelBenchmark concerning the occupancy rate at hotels, itdecreased by 22% as compared to the same period lastyear and reached 47%.

Further, rate per available room decreased by 17% ascompared to the same period of 2010, reaching a valueof USD 203 in the same said period.

2. Tourism

According to the figures released by the Ministry of Tourism,the number of tourists visiting Lebanon decreased by 13%in the first quarter of 2011 relative to the same period of2010 to reach 393,212 as compared to 451,967 in the sameperiod of 2010.

As for the distribution of tourists by countries, it showsthat the greater part of visitors were from Arab countrieswith 33.4% of aggregate visitors, followed by visitors fromEurope with 26%, visitors from Asia with 25.2%, visitorsfrom the Americas with 9.6%, visitors from Africa with3.2%., and visitors from Oceania with 2.3%.

3. Airport Activity

Based on the figures released by the Hariri InternationalAirport (HIA), the number of airport passengers amountedto 1,009,920 in the first quarter of 2011, decreased by5.1% year-on-year. As for the distribution of passengersfrom different countries, passengers from the UAEaccounted for 21.1% of total passengers, followed by those

4. Port of Beirut

Figures released by the Beirut Port Authority show thatthe total tonnage of loaded and unloaded merchandisedecreased by 0.8% in the first quarter of 2011 relative tothe same period of 2010, to reach 1.55 million tons inMarch 2011. The number of containers declined by 5.3%in the first quarter of 2011 as compared to the sameperiod of 2010, to reach 131,669. Also the total number ofships reached 530 in the first quarter of 2011, down by6% as compared to the same period of 2010. Whereas,total transshipments surged by 49.2% as compared tothe same period of 2010, to reach 109,343 in the firstquarter 2011.




5. Customs Receipts

Based on the figures released by the Customs Directorate,customs revenues reached USD 371.4 million in the firstquarter of 2011, decreased 18.6% from the same periodof 2010.

The Port of Beirut continues to be the main point ofcustoms revenues, accounting for 85.5% of the total,followed by the Hariri International Airport, the Port ofTripoli, and the Masnaa Crossing point with 7.3%, 3.6%,and 2.2% respectively. Overall customs receipts reachedUSD 709 million in the first quarter of 2011 whenincluding revenues from the value-added tax thatamounted to USD 337.6 million over that period of time.

6. Clearing Activity

Based on the figures released by the Association of Banks,the value of cleared checks increased by 0.4% as


76

2. Public Debt

Based on the figures issued by the Ministry of Finance,the gross public debt reached USD 52.59 billion at theend of March 2011, constituting an increase of 2.1% fromMarch 2010.

Domestic debt increased by 7.55% to USD 31.73 billion,while external debt decreased by 2.1% annually toUSD 20.86 billion. Local currency debt accounted for 60.3%of gross public debt at end-March 2011 compared to 57.3%a year earlier, while foreign currency denominated debtrepresented 39.7% of the total at the end of March 2011relative to 41.2% a year earlier.

Commercial banks accounted for 66% of total publicdebt at the end of March 2011 compared to 59% a yearearlier. They were followed by the Central Bank ofLebanon with 18%, down from 20% at end-March 2010;while public agencies, financial institutions and thegeneral public held 10% of the debt relative to 10.5% ayear earlier. Further, bilateral and multilateral loansaccounted for 4.8% of total public debt, down from5.5% at end-March 2010, while other public debt holdersheld the remaining 1.2% compared to 4.8% a year earlier.

Net public debt, which excludes the public sector's depositsat the Central Bank of Lebanon and at commercial banksfrom overall debt figures, increased annually by 2.7% toUSD 45.6 .

III. Public Finances

1. Fiscal Deficit

According to the figures released by the Ministry ofFinance, the fiscal deficit has increased by 92%, to reachan amount of USD 1.1 billion in the first quarter of 2011.Overall government revenues which include budget andTreasury receipts, decreased by 11.5% relative to the sameperiod of 2010, to reach USD 1.8 billion in the first quarter of2011. Treasury revenues registered an increase from USD 125million to become USD 160 million. Budget revenuesdecreased by 23.7% to reach USD 1.64 billion due to thedecline in tax and customs revenues. Total tax revenues fellby 4.4%, to reach USD 1.45 billion. As for non-tax revenues,they dropped by 46% to reach USD 202.5 million.

While on the spending side, total public expenditures,which include budgetary and Treasury spending,increased by a yearly 11.1% in the first quarter of 2011 toreach USD 2.9 billion, caused mainly by a rise of 13.9% inbudgetary expenditures.

Interest payments on domestic and foreign debt decreasedby 1.6% as compared to the same period of 2010, to reacha total of USD 912 million in the first quarter of 2011.

When excluding debt service, the first quarter of 2011have been worsened with respect to the level of theprimary balance, which registered a cumulative deficit ofUSD 111 million, compared to a surplus of USD 471 millionin the first quarter of 2010.

8. Cars Sales

Based on the figures released by the Association ofAutomobile Importers in Lebanon, the number of carssold during the first quarter of 2011, reached 6,483 newcars, constituting an increase of 7.4% from the 6,039 carssold in the same period of 2010.

9. Kafalat Loan Guarantees

Based on the figures released by the Kafalat Corporation,loans under the guarantee of Kafalat has decreased by9.5% in the first quarter of 2011, reaching an amount of

USD 41.9 million, as compared to USD 46.3 million in thesame period of 2010.

The number of loan guarantees reached 301 in the saidperiod, as compared to 393 in the same period of previousyear. The average loan size increased by 17.8% to reachUSD 139,183 in the first three months of 2011, as comparedto USD 118,173 in the same period of the previous year.

Real Sector's Indicators

Construction permits (in million square meters)Sales transactionsNumber of tourists Number of passengers at HIACustoms revenues (USD, million)Cleared checks (USD, billion)Hotel occupancy Rate (%)Number of containers at Beirut portNumber of car salesNumber of kafalat guarantees

Sources: Official Departments

Variation

-18.4%18.2%-13%-5.1%

-18.6%0.4%-22%-5.3%7.4%

-23.4%

Q1 2010

3.83,322

451,9671,063,776

45616.969%

139,0386,039393

Q1 2011Indicators

3.13,926

393,2121,009,920

371.416.9747%

131,6696,483301





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Public Finances' Indicators

Public revenues (USD, billion)Public expenditures (USD, billion)Deficit (USD, billion)Deficit /expenditures (%)Gross public indebtedness (USD, billion)Net public debt (USD, billion)

Sources: Ministry of Finance and Central Bank of Lebanon

Variation

-11.5%11.1%92%7.6%2.1%2.7%

Q1 2010

2.032.6180.5

30.3%51.5044.4

Q1 2011Indicators

1.82.91.1

37.9%52.5945.6

Monetary Situation's Indicators

USD/LBP exchange rateBDL assets in FX (USD, billion)BDL gold reserves (USD, billion)Money supply M3 (USD, billion)Inflation rate (%)

Sources: Central Bank of Lebanon and Association of Banks

Variation

0%1%

29.3%9.2%1.6%

Q1 2010

1,507.530.1

10.2184.974.5%

Q1 2011Indicators

1,507.530.413.2

92.756.1%

2. Consumer Prices

Based on the figures issued by the Central Administrationof Statistics, inflation rose by 6.1% in the first quarter of2011. This is due to the increase in prices of mostcommodities in the Lebanese market, such as pricesof clothing and footwear, which increased by 27.3%,followed by prices of water & fuels (14%), prices atrestaurants & hotels (7%), transportation (6.9%),education (6.7%), and food and beverages (6.3%).

IV. Monetary Situation

1. Money Supply

Based on the data issued by the Central Bank of Lebanon,Money supply (M3) expanded broadly to reach USD92.75 billion over the first quarter of 2011, an increase ofUSD 7.78 billion or 9.2% as compared to its level duringthe corresponding period of 2010. This resulted from anincrease in local currency denominated time deposits ofUSD 400 million, a rise in foreign currency deposits ofUSD 6.87 billion, and a surge in money supply (M1) ofUSD 500 million.

3. Central Bank Foreign Assets

According to the figures released by the Central Bank ofLebanon, its balance sheet reached USD 60.4 billion atthe end of the first quarter of 2011 compared toUSD 56.1 billion in the same period of 2010. Assets inforeign currencies increased by 1% to reachUSD 30.4 billion, as compared to USD 30.1 billion in thesame period of 2010. Its gold reserves increased by 29.3%from its value in the same period of 2010, to reach a valueof USD 13.2 billion in the first quarter of 2011.

Also deposits of the financial sector rose by 10.6% in thefirst quarter of 2011, to USD 44.2 billion due to capitalinflows into the banking sector. While deposits of thepublic sector declined by 10% in the first quarter of 2011,to reach a value of USD 5.4 billion.

V. Financial Sector

1. Banking Sector

Based on the figures released by the Central Bank ofLebanon, the banking sector's total assets reachedUSD 132.5 billion in the first quarter of 2011, an increaseof 10.50% as compared to the same period of 2010.Private sector deposits have also increased by 10.23%from the same period of 2010, to reach USD 108.14 billion.

Deposits in Lebanese pounds rose by 2.46% from thesame period of 2010, to reach USD 36.9 billion, while

deposits in foreign currencies increased by 14.69% fromthe same period of 2010, to reach USD 47.23 million.Non-resident foreign currency deposits had increased by14.12% from the same period of 2010, to reachUSD 18.3 billion. The dollarization rate of depositsincreased by 2.58% as compared to the same period of2010, to reach 65.86% at end of March 2011.





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2011 to reach USD 19.38 million as compared to USD16.99 million in the same period of 2010.

The ratio of private sector loans to deposits decreasedfrom 41.3% in the first quarter of 2010 to 41.05% in thefirst quarter of 2011. The banks' aggregate capital basehas increased by 20.38% in the first three months of 2011to reach USD 9.51 billion.

Further, loans to private sector have increased by 18.63%in the first quarter of 2011 as compared to the sameperiod of 2010, to reach USD 36.42 billion. Lending inLebanese pounds increased by 41.83% in the first quarterof 2011 to reach USD 7.19 billion as compared to USD5.07 billion in the same period of 2010. While lending in USdollars increased by 14.04% in the first three months of

Banking Sector's Indicators

Total assets (USD, billion)Total deposits (USD, billion)Total loans (USD, billion)Ratio of private sector's loans to deposits (%)Banks' capital base (USD, billion)

Sources: Central Bank of Lebanon and Association of Banks

Variation

10.50%10.23%18.63%-0.25%20.38%

Q1 2010

119.998.130.7

41.3%7.9

Q1 2011Indicators

132.5108.1436.42

41.05%9.51

BSE Indicators

Market capitalization (USD, billion)Total trading volume (in millions of shares)Aggregate turnover (USD, million)Average daily volume (Shares)Average daily value (USD, million)

Sources: BSE and Central Bank of Lebanon

Variation

-9.0%-67%

-87.5%-66.6%-87.5%

Q1 2010

13.375.4

1,2001,277,270

20

Q1 2011Indicators

12.125.2

149.8426,403

2.5

2. Capital Market

Figures released by the Beirut Stock Exchange indicatethat the total trading volume decreased by 67% in thefirst quarter of 2011, as compared to the correspondingperiod of 2010, to reach 25.2 million shares. Whileaggregate turnover decreased by 87.5% to reach anamount of USD 149.8 million.

Market capitalization fell by 9% to USD 12.1 billion, ofwhich 71.6% was in banking stocks and 25.7% in realestate stocks. The market liquidity ratio decreased to1.2%, as compared to 8.9% for the same period of 2010.

In terms of value of shares traded, banking stocksaccounted for 45.7% of aggregate value, and real estatestocks with 52.5%. The average daily traded volume forthe period was 426,403 shares for an average daily valueof USD 2.5 million.





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3. Balance of Payments

Based on the figures issued by the Central Bank ofLebanon, Lebanon's balance of payments posted adeficit of USD 399 million in the first quarter of 2011compared to a surplus of USD 978 million in the sameperiod last year. This cumulative deficit over the firstquarter of 2011 was caused by a deficit of USD 205.8 millionin the Central Bank of Lebanon's net foreign assetsand a deficit of USD 193.4 million in those of banks andfinancial institutions. The balance of payments posted acumulative surplus of USD 3.3 billion in 2010, USD 7.9 billionin 2009, and USD 3.5 billion in 2008.

VI. Foreign Sector

1. Foreign Trade

According to figures issued by the Higher CustomsCouncil, imports increased by 4% to reach USD 4.6 billionin the first quarter of 2011, while exports decreased by 7% toreach USD 955 million in the same period, leading to anincrease of 8% in trade deficit to reach USD 3.65 billion. The main sources of imports are the United States with12% of total imports, followed by Italy (9%), China (8%),France (7%), and Germany (6%). While the main sourcesof exports are Switzerland with 10% of total exports,followed by UAE (10%), Saudi Arabia (8%), Turkey (7%),Iraq (6%), and Syria (5%).

2. Capital Inflows

Based on the figures released by the Higher CustomsCouncil, capital inflows declined by 25.6% to reach anamount of USD 3.22 billion in the first quarter of 2011,due to the existing regional turmoil that did not yetbenefit the Lebanese tourism and financial sectors, as tourists' spending constitutes a major portion offinancial inflows.

VII. Economic Prospects

Needless to say, the current political paralysis in Lebanon,coupled by the continued turmoil in the region, and theexpected higher inflation in the international marketplace,will reflect negatively on growth prospects for 2011.

In this context, the International Monetary Fund (IMF)projected the economic growth in Lebanon at 2.5% in2011 compared to 4.2% in MENA, 6.5% in developingcountries, and 4.4% for the world economy. This madeLebanon, the fourth slowest growing economy in MENA,proceeding Tunisia and Egypt at 1.3% and 1% respectively.It also forecasted Lebanon's real GDP growth at 5% in2012 compared to 4.2% in MENA.

The Fund forecasts inflation in Lebanon to 6.5% in 2011compared to 4.5% in 2010, and 1.5% in 2009. It alsoprojected Lebanon's current account deficit at 12.9%

of GDP in 2011 compared to a deficit of 10.2% of GDP in2010 and 9.4% of GDP in 2009.

Foreign Sector's Indicators

Trade deficit (USD, billion)Exports (USD, billion)Imports (USD, billion)Capital inflows (USD, billion)Balance of Payments (USD, million)

Sources: Higher Customs Council and Central Bank of Lebanon

Variation

8.0%-7.0%4.0%

-25.6%-140.8%

Q1 2010

3.381.024.424.33978

Q1 2011Indicators

3.650.954.6

3.22-399




Source: International Monetary Fund, April 2011


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Arab Capital Markets: Developments Under Reforms – Year 2010

IntroductionThe improvement in the performance of Arab economieswas reflected by high economic growth rates for mostArab countries that benefited from the improvement inoil prices, besides the continuous stability and growthfactors in the global and developing financial marketsduring the year 2010. This resulted in a steady upwardtrend in the indicators of Arab capital markets during thisperiod, although these indicators are still below theirlevels before the global financial crisis for most markets,unlike some emerging or other developed markets,which are now approaching to their pre-crisis levels, andsome of which have already reached those levels.

This improvement in 2010 wasn't restricted in theincrease of price indices, but the overall performanceduring this period has been accompanied by a rise inliquidity of most Arab capital markets, and it has alsorecorded the highest investment level in these marketssince the eruption of the global financial crisis in thesecond half of 2008. What is also considerable theresumption of the improvement in the IPOs activityduring the current year compared with the year 2009, aswell as the bond issuance by Arab companies.

The supervisory bodies and authorities have continuedtheir efforts to strengthen the safety and control overdomestic capital markets, which were represented inintroducing new guidelines and instructions, besidesthe implementation of practices of sound corporategovernance and trading.

Advancing Performance for ArabCapital MarketsThe Arab Monetary Fund Composite Index, whichmeasures the cumulative performance of Arab capitalmarkets, increased by 5.1% during 2010, as compared to2009, in accordance with the upward movement witnessedduring this year in most global and emerging stock markets.

However, this progress in the leading indicators of Arabcapital markets for this period, was relatively lower thanthe progress recorded for most global stock markets'price indices with the exception of French bourse (CAC),whose index rose by about 2.4% only. Moreover the Arabmarkets' performance indicators are inferior to those of mostemerging market indices, except Eastern Europe markets.

Now considering the individual performance of ArabMarkets in 2010, the improvement has covered mostArab markets during this year. The Arab Monetary Fundindices show a decrease in the markets of Palestine,Bahrain, Dubai and Kuwait, besides the Tunis StockExchange index which fell by 11.9%, the highest decreaseamong Arab stock markets during this year.

The percentage rise in the Fund's indicators during thisyear reached its highest level in the Qatar Stock Exchangeof around 11%, followed by the Casablanca and AlgeriaStock Exchanges with about 7.6% and 6.2% respectively,followed by the Saudi Financial Market by 4.5%, and thenEgypt, Oman, Muscat, Abu Dhabi, Beirut and Khartoum SockExchanges with growth rates ranged between 0.2% and 3%.

It is similar for local price indicators conducted by thedomestic markets, where these indicators witnessed arise in the year 2010, including Qatar, Casablanca, Muscat,Egypt, Saudi Arabia, Amman, Beirut, Abu Dhabi andKhartoum Stock Exchanges, while the indicators of thefive stock exchanges shown above have fallen.

Also the total market value of Arab capital markets thatare included in the Arab Monetary Fund's database,increased by 8.9% during the year 2010, as compared toyear 2009, which is less than the growth rate in themarket value of the total world stock markets during2010 that reached about 14.9%, according to the WorldUnion of Stock Exchanges.

Improved Market Capitalization

As per the market value of each Arab capital market, itshould be noted that the market values of most Arabcapital markets have improved during the year 2010 ascompared to the previous year, with the exception ofTunisia, Dubai and Palestine Stock Exchanges. The marketvalue of the Saudi Stock Exchange increased by 5% toreach USD 353.4 billion at the end of December 2010.This value represents about 36% of the market value ofArab capital markets.

Qatar Stock Exchange came in second place in terms ofmarket value, at USD 123.6 billion, followed by KuwaitStock Market at USD 113.9 billion, then Egypt StockExchange at USD 84.1 billion, and Abu Dhabi StockExchange at USD 77.1 billion in December 2010.Furthermore the market value of the Casablanca StockExchange was at USD 69.4 billion, and Dubai CapitalMarket at USD 54.7 billion, followed by Oman and Muscatmarkets at USD 30.9 and 28.3 billion respectively, at theend of the same period.

The highest growth rate in market value during thefourth quarter of 2010 was in the Bahrain Stock Exchangeby 19.4%, in line with the listing of Bahrain AluminumCompany "Alba" in November 2010.

The Qatar Stock Exchange came second in terms ofmarket value growth rate at 11%, then the Muscat CapitalMarket at 9%.

As for the number of listed companies in the Arab financialmarkets that are included in the database, it reached 5,764companies at the end of December 2010. Most notablyamong the new listed companies during the year 2010are Mazaya Qatar for Real Estate in Qatar Stock Exchange,and Bahrain Aluminum Company "Alba".

As for the value of shares traded during 2010, the datashow a continuous decline in its value which amountedto USD 379.5 billion this year, a shortfall by USD 274 billionfrom the value of shares traded during the previous yearwhich amounted to USD 653.5 billion. It is also lower byabout USD 618.5 billion of the value of shares tradedduring the year 2008, which amounted to USD 998 billion.




Source: Arab Monetary Fund




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The value of traded shares in six capital markets only,which are Saudi, Kuwait, UAE, Qatar and Egypt StockExchanges accounted for 88.9% of the total value traded in

Individual Performance of CapitalMarketsThe table (1) shows the key financial developments thatoccurred in the Arab capital markets in 2010, as comparedwith the previous three years.

Continued efforts emerged particularly to apply andcomply with the principles of sound corporategovernance, as in the case of Saudi Arabia, whichintroduced some mandatorily amendments to thecorporate governance laws with regards to independentmember and remuneration committee. Also in Jordan,companies have to include a special chapter in theirannual reports on the implementation of corporategovernance. In the Sultanate of Oman, the Amman Centerfor Corporate Governance continues its training activity torehabilitate senior managers. In addition to UAE, where theEmirates Securities and Commodities Commission startedto send field missions to check the compliance with thestandards of good corporate governance.

On the other hand, some bodies introduced amendmentsto their laws to strengthen protection, as in the case ofEgypt, where the Financial Supervisory Authority (FSA)issued throughout the year a set of new regulations,most notably with regard to organize the activity offinancial consulting firms. Also during this year, somestock exchanges have eased trading in domestic markets,as in the case of Bahrain, through smooth instructionsregarding the trading of key persons, without breachingthe compliance requirements with supervisionstandards, as well as in Qatar and Morocco in terms ofmodifying price limits, in addition to UAE, where thelicense option was introduced to margin trading.

Also during this year, significant developments includedwhat have been taken by the GCC financial marketsbodies in their meeting at the presidents’ level, whichwas held in October 2010, in the steps of a uniformsystem project for stocks' inclusion, and the adoption ofunified lists for the issuance and offering of securities.

Effects of the International Crisis Most Arab capital markets witness a significant decline intheir performance since the eruption of the internationalfinancial crisis in the second half of 2008. The Arab capitalmarkets were affected as the rest of emerging markets bythe unstable situation in global financial markets, due tothe concerns of the global debt crisis that emergedduring the last period in the United States and Europe.

This affected the uncertainty climate for investors andtheir view of the future. This performance was alsoaffected by the observed decline in the profitability of anumber of companies and shrinking cash dividends. As aresult, most key indicators in the Arab markets droppedat different proportions between one country andanother, thus reflecting the correlation of Arab capitalmarkets with global markets, and their high responsivenessto changes that may arise in these markets.

It can be inferred in general that the main cause of theglobal crisis was the unbalanced growth in globalfinancial markets during the past years, where the marketcapitalization of all global markets reached during theperiod between 1997 and 2007 a rate of 147%, while theworld Gross National Product (GNP) has increased by81% only in the same period. This unbalanced growthcreated a severe regressive motion to restore prices inthese markets to more rational levels, including the Arabmarkets that were affected by this wave, with a decline of64.76%, knowing that the decline in global and emergingmarkets were 59.61% and 66.06% respectively.

However, the global emerging and Arab markets hadbegun to recover and gradually improve since thesecond quarter of 2009, but the improvement in Arabmarkets was slower than that observed in the global andemerging markets. While international markets had offset52% of their losses, and emerging markets 68%, the Arabmarkets merely compensated only 30% of their lossesup to 2010.

Required Restructuring The international financial crisis has reflected thesignificance of confidence in markets. It is well knownthat the confidence factor is the most important factor incapital markets, and in all fields, confidence is built overmany years and is lost in days. The confidence crisis in thefinancial markets was reflected in the investors'withdrawal of their money from troubled companiestowards investing in treasury bonds, which increased theseverity of this financial crisis, and then the governmentsre-invested such funds in such companies to support them.

On the other hand, the market capitalization increased by11.77% in 2010 to reach USD 991,533.62, as compared toUSD 887,087.36 in 2009, which reflects the recoveryatmosphere dominating this market since the secondhalf of 2009, but it is still below its 2007 level atUSD 1,330,400.45.

The number of offerings in the Arab capital markets alsoincreased during the year 2010 to reach 27 offerings ascompared to 17 offerings in 2009. The total value of theseofferings reached USD 2,751 million during the year 2010,an increase of 28% from the value of the offerings in2009. These offerings were distributed between Bahrain,Egypt, Morocco, Saudi Arabia, Tunisia and Palestinemarkets. This improvement hasn't been restricted to thenumber and size of IPOs during this period, but it alsoincluded the coverage ratios that were high in theofferings of Tunisia, Morocco and Egypt.

Measures to Strengthen CorporateGovernanceThe supervisory Arab authorities and bodies havecontinued, during the year 2010, their efforts to strengthenmonitoring capabilities and tools, and to protect clients.

Key Indicators of the Arab Markets (Table 1)

Total traded value (USD)Number of traded sharesMarket capitalization (USD)Number of transactions Number of trading days


1,005,029.70281,038.29

1,330,400.4530,748,424

2,988

2010

348,944.77200,757.89991,533.6232,519,155

3,156

2009

567,872.92350,816.30887,087.3636,451,260

3,151

20082007Indicators

891,999.98280,373.68805,561.9835,438,420

3,041




the Arab capital markets during this year, of which 52.2% isthe market share of the Saudi Stock Exchange.

The number of shares traded decreased by 42.77% in 2010,to reach 200,757.89 shares, as compared to 350,816.30shares in 2009.



1918

What is needed at this stage is to take quick steps torestore the investors' confidence in these markets, andprevent the sliding of these markets in future similarcrisis, especially that the loss of Arab private investorsfrom the crisis has exceeded USD 5 billion. Steps shouldbe taken as follows:

• Update and tighten supervision, disclosure andtransparency tools, through the initiation of earlymechanisms to be followed by those bodies responsiblefor management of markets in periods of crisis, in ordernot to be surprised and take decisions under the effectof the crisis, and thus they come in the form ofreactions rather than preventive actions.

• Raise saving and investment awareness among Arabcitizens, unify the securities laws among Arab markets,create a common index for Arab markets, and establisha common system to link Arab clearing rooms in orderto facilitate the Arab funds and securities movementamong them.

• Adopt and implement appropriate regulatory frameworksto deal with the financial innovations of derivativesand complex financial instruments, which will lead tostrengthen the role of risk management.

• Intensify the training and exchange of experiencesamong markets in order to provide Arab investors withthe financial knowledge, investment skills and goodguidance to accommodate the investment operationsand tools.

Future ProspectsFinancial markets are mostly affected by domestic andinternational crises, given the nature of most risk-avoiding investors. Accordingly, the performance of Arab

capital markets can be estimated in the light of recentpolitical developments witnessed by a number of Arabcountries. However, these developments in spite of theirnegative repercussions on these markets in the shortterm, they are expected to lead to radical changes in thesystems of some Arab countries, strengthen economicand social reforms, and activate the role of the youth andensure their participation in key decisions, besidesactivating the role of the private sector in economic life.This will positively be reflected on the Arab markets ingeneral, and Arab capital markets in particular, which willplay a real role as a source of finance for Arab companies.

This will re-launch the Arab economic development on abetter basis, and restore confidence to Arab markets thatwill become a safe destination to attract Arab and foreigninvestments into their economic and financial markets.This will contribute to the establishment of economicprojects and create new job opportunities for the youth.Also this will reduce the unemployment rate, and easethe migration of educated people who will be betteremployed in the Arab region. All this is expected to leadto achieving balanced economic growth in the Arabregion in the future.

Development of Beirut Stock ExchangePrice indices for the Beirut Stock Exchange (BSE) increasedin 2010 as compared to the previous year, where its indexrose by 2.7% during this period to reach 132.8 points atthe end of December 2010.

Based on BSE statistics, the total trading volume reached164 million shares in 2010, an increase of 60.5%compared to 2009. Also the total turnover volume increasedby 87% in 2010 to reach USD 1.87 billion. The average dailytrading volume index increased to 674,813 shares in 2010,as compared to 418,618 shares in 2009 (See Table (2)).

The market capitalization ratio reached 14.7% in 2010 ascompared to 8.1% in 2009. Banking shares formed 90.4%of the total trading volume, and 81.5% of their total value,which the construction shares constituted 9.3% of thetotal volume, and 18.2% of their total value.

Beirut Stock Exchange Indicators (table 2)

Market capitalization (USD billion)Total trading value (USD million)Market liquidityTotal trading turnover (USD billion)Average daily trading volume (share)

Sources: Beirut Stock Exchange and the Central Bank of Lebanon

Variation

-1.3%60.5%6.6%87%

61.2%

2009

12.86102.18

8.1%1.0

418,618

2010Indicators

12.7164

14.7%1.87

674,813




Source: Arab Monetary Fund, the capital markets reports, fourth quarter of 2010

Sources: Beirut Stock Exchange and the Central Bank of Lebanon


20

Inter-Related Economic DevelopmentsIt is estimated that the Gross Domestic Product (GDP)grew by a real rate of 7% in 2010, slightly less than thegrowth rate of the previous year. The general index ofeconomic activity that is calculated by the Central Bankof Lebanon, recorded an annual rise of 10.5% at the endof December 2010, relative to a rise of 13.5% in theprevious year.

As for the inflation rate, based on the changes inConsumer Price Indices, it has reached 6.2% for 2010. Interms of public finance, the data show a relativeimprovement in the situation of public finances in 2010.The budget deficit has slightly decreased by 1.3% duringthis year, reaching USD 2,922 million, representing 7.5%of GDP, as compared to a deficit of USD 2,959 million, and8.6% of GDP in the previous year. The public expenditurehad been controlled to reach LBP 17,089 billion in 2010,which is 1% less than the expenditure in the previousyear. Treasury expenses reached LBP 1,860 billion, adecrease of 1.1%, while budget expenditures amountedto LBP 15,229 billion, a decrease of 0.4% during this year.Public revenues have also been stable and close to theirlevel recorded in the previous year to reach LBP 12,684 billionin 2010, as compared to LBP 12,705 billion in 2009. Itshould be noted that the stability of public revenues

have been affected by the improvement in tax revenuesthat grew by 11.13% during the year after the expansion inVAT, due to the fact that this improvement in tax revenueswere reduced by the decline in non-tax revenues.

It should be noted that, excluding debt-serviceexpenses that amounted to LBP 5,893 billion duringthe year, the general budget has achieved a primarysurplus in 2010 and amounted to LBP 1,813 billion, anincrease of LBP 188 billion from that recorded in theprevious year, where it amounted to LBP 1,625 billion.

With regard to public debt, this debt has increased by2.9% in 2010, to reach LBP 79,278 billion, or USD 52.6 billionat the end of December 2010. This represents animprovement as compared with the increased rates inthe debt level recorded in previous years, which amountedto 7.7% and 11.9% for 2008 and 2009 respectively. Thisdebt is distributed between USD 20.57 billion debtdenominated in foreign currencies, and LBP 48,270 billion,or USD 32.02 billion debt in Lebanese pounds. It is shouldbe mentioned that the net debt (after excluding publicsector deposits) reached LBP 67,859 billion, or USD 45 billionat the end of 2010.

The Economic Bulletin is a research document that is owned and published by Fransabank SAL. This bulletin provides the reader with an overview ofthe most recent developments in the Lebanese economy and the banking sector in general, coupled with a study on the most prominent emergingdevelopments in the banking and finance sectors both on the local, regional and international aspects. The information and opinions contained in this document has been compiled in good faith from sources deemed reliable. Neither Fransabank SAL,nor any of its subsidiaries and associate will make any representation or warranty to the accuracy or completeness of the information herein. Thisdocument is strictly for information purposes.

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