[LCM Articles] For those interested in the stock market..

[Omar Kanafani]

Lebanon counts the cost of war

By Neil MacDonald in Beruit

Published: August 21 2006 18:50 | Last updated: August 21 2006 18:50

Lebanese shares have recovered strongly in the past few days, despite
continued uncertainty about the United Nations-brokered ceasefire, in place
for just over a week.

The Beirut Stock Exchange's market capitalisation on July 11, the eve of the
war, was $10.53bn. After falling during the war to a low of $8.6bn on August
9, this had recovered to $9.7bn by the end of trading on Monday. But an
Israeli commando raid at the weekend, allegedly to intercept weapons,
appeared to unsettle some investors.

"If not for Israel's breach of the [UN] resolution, we would see much
stronger buying," says Nabil Chaya, head of capital markets at Bank Audi SAL
in Beirut.

The exchange closed for two weeks but resumed trading with the war still on,
albeit with shorter trading hours and the daily limit on price fluctuations
reduced to 5 per cent instead of 15. Most stocks gained the full 5 per cent
on Friday August 11, when the UN ceasefire resolution was announced.

Israeli attacks caused $3.5bn of direct damage to buildings and
infrastructure, according to Lebanese officials. The 34-day war also ruined
the tourism summer, steering the economy from a promising first half towards
zero or even negative growth for the full year.

"Approximately $1.1bn of economic activity that would have occurred now will
not," JPMorgan said in a report last week. "The economic cost of the crisis
may total $5-$6bn, or 23-27 per cent of gross domestic product."

The BSE reeled from the impact, though perhaps not as much as it might have
done based on business fundamentals, says Philip Khoury, head of research at
EFG-Hermes, a regional investment bank. But two important sectors – banking
and downtown Beirut real estate – differed in their behaviour. Solidere, the
real estate development corporation that is Lebanon's largest company, was
hit hard, falling from $22 a share before the war to a low of $14.93 on
August 9. It has since recovered to more than $19.

But the three big banks – Bank Audi, Blom Bank and Byblos Bank – suffered
limited losses. Liquidity in bank stocks is lower, so price fluctuations
happened on thin volume.

"With more liquidity in the stock market, I'd have expected [bank] stocks to
be harder hit," as Solidere was, Mr Khoury says.

Still, the banks can look forward to an infusion of reconstruction payments.


The Saudi and Kuwaiti governments have promised humanitarian and
reconstruction packages worth a combined $1.1bn. The same two Gulf states
helped shore up the Lebanese pound through five-year deposits worth $1.5bn
during the war.

More commitments are expected at an international donors' conference in
Stockholm later this month. But they will depend, at least partly, on the
ceasefire's durability.

The BSE was already trading at a discount because of political and economic
risk. Stocks had lower price/earnings ratios than those of other Middle
Eastern and North African non-oil markets, reflecting the country's high
public debt in addition to its lack of control over Hizbollah and other
militias, Mr Khoury says.

The last unspoiled year was 2004, when growth reached 6 per cent. Local
analysts say they had counted on 4-5 per cent this year. Growth stalled at 1
per cent last year after the assassination of the prime minister and
Solidere founder, Rafiq Hariri.

Some analysts talk about how the economy and the BSE bounced back after that
shock. Protests after the Hariri assassination produced changes, including
the peaceful exit of Syrian troops. Armed groups, especially Hizbollah,
remained unintegrated but the Lebanese state appeared to grow stronger.

Will the current ceasefire produce further political progress? Signs of
unity at the government level are cause for optimism, Banque Audi analysts
say.

At the same time, banks face a new upsurge in non-performing loans, while
the public debt problem has worsened.

"Is the banking system going to collapse? No," Mr Khoury says. "But how is
the country going to look in two years?"

Copyright <http://www.ft.com/servicestools/help/copyright> The Financial
Times Limited 2006
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mailman.mit.edu/pipermail/lebanon-articles/attachments/20060822/76e3ec0a/attachment.htm