Disparities in the Arab capital markets, their potential for development and the challenges they face in a rapidly changing financial world were the issues brought into sharp focus during a conference* in Beirut on 21-22 June. The setting also put the spotlight on Lebanon's aspirations to regain its premier position in the Arab financial community. Yet this served to highlight some of the difficulties affecting all the emerging Arab markets, as speakers emphasised the need for a stable investment environment that can mobilise domestic investors and encourage greater foreign participation.

'The time has come to attract Arab capital to the Arab markets, and with it the opportunity of attracting some non-Arab capital,' Lebanon's Prime Minister Rafiq Hariri told delegates in the keynote address. To succeed, Arab markets will have to show greater co-operation, including adopting similar accounting standards, opening the way for cross-listing and co- ordinating the regulatory environment, he said. Regional markets will also have to pay close attention to the international financial community, and will have to take a 'qualitative leap forward' if they are to compete. Beirut is already moving apace with the development of its own capital market, Hariri said, and the stock exchange should begin trading before the end of this year.

Riad Salameh, governor of the Banque du Liban (central bank), also spoke of the government's efforts to revive Lebanon's financial centre, including plans to issue a second $300 million Eurobond. However, Arab capital will be essential in this development process, and he said Arab markets will be the first to be invited to subscribe to the Eurobond issue that will take place in July.

Also speaking in the opening ceremony was Raouf Abou Zaki, the editor- in-chief of the business magazine Al-Iktissad Wal-Amal, the conference organisers, and Francois Bassil, chairman of the association of banks in Lebanon.

'Arab countries need to move in the same direction as the international community to liberalise their private sector,' Sheikh Hamad al-Sayari, governor of the Saudi Arabian Monetary Authority said in the introduction to a session on regional changes in Arab economies. But he said governments had failed to co-ordinate in the development process, leaving the region weaker against the expanding number of international trading blocs. This set the tone for a series of speeches which catalogued the disparities in economic development in the Arab world and highlighted the need for a greater emphasis on balancing budgets and increasing the role of the private sector.

External debt

Jassim al-Mannai, chairman of the Arab Monetary Fund, said governments which had sought to control the banking sector had marginalised the role of private finance, an increasingly important source of funds. Abdul Aziz Dukheil commented on one of the effects of this failure to mobilise private finance: 'External debt has become a characteristic of Arab countries.' Dukheil, president of Saudi Arabia's Consulting Center for Finance & Investment, said this characteristic was now true for oil and non-oil producers alike.

Abdullah Saudi, founder of Arab Banking Corporation and now president of ASA Consultants, spoke of Beirut's wish to lead the Arab financial community, but also pointed to the changes which had taken place since Lebanon's capital relinquished its position during 15 years of civil war, including the globalisation of financial services. 'Beirut must try to compete with international markets, not only with Arab markets,' he said at the start of a session on the role of capital markets in attracting foreign capital. '(The Middle East) is the latest frontier in emerging markets investing, but it is a small part of the emerging markets' universe,' said Iyad Malas, the International Finance Corporation's regional capital markets manager for the Middle East and North Africa. However, the Arab markets must improve the legal framework and trading systems if they are to increase their share of foreign equity flows. However, he also said stability and long-term growth will only come from domestic investors. 'For the development of any capital market you need to develop domestic institutional investors...you cannot just rely on foreign portfolio investment,' he said.

But, according to David Edgerly, who manages the Middle East funds held by Alliance Capital Management, Arab markets are far from reliant on foreign investment. 'I and other (fund managers) view Arab capital markets with a great deal of optimism, but also with an equal degree of frustration,' he said. 'We are frustrated by what we see as the serious misunderstanding of the nature and intent of foreign investing.' Portfolio managers can bring long-term financing which the region needs, and is not simply a recipe for volatility and inflated prices. 'I urge you not to fear this kind of portfolio investment,' he said.

* The Arab Capital Markets, Beirut, arranged by the Arabic business magazine Al-Iktissad Wal-Amal, 21-22 June.