Palestine Exchange Chief Calls for Recognition

Euromoney, September 2015

You are Palestine. How do you demonstrate that your occupied, unrecognised state is a viable economic entity with a future? You build a stock exchange. And after 13 years, the Palestine Exchange’s CEO believes it is ready for recognition by the World Federation of Exchanges and international indices.

“The stock exchange is very important for Palestine because it plays a big role as a mediator between savings and investors,” says Ahmad Aweidah, CEO, in the exchange’s head office in Nablus. “It gives businesses and entrepreneurs an efficient and quick and relatively cheap way of raising capital.

“Obviously the exchange has gone through cycles, which is fairly normal I think,” he says – which is putting it mildly, given that those cycles include the Second Intifada and an eight-month military curfew in Nablus when the exchange was kept running by staff sleeping on the floor. “But what I think is important about the exchange is that we are not the exchange of the Palestinian Authority, or of the West Bank, but of the Palestinian people, wherever they may be.”

He stresses this because including the Palestinian diaspora makes a vast economic difference. Estimates suggest that expatriates who continue to identify themselves as Palestinian may have a combined net worth of as much as $100 billion (see main story). There are 12 million, compared to four million people who live in what is generally accepted to be Palestine. The vision for the exchange is that, rather than just having Palestinian businesses listed on it, it will also attract these distant Palestinians, although there’s been little success to date since the market lacks sufficient liquidity.

There’s no question the market has confounded some doubters. “When the exchange was set up in 97, very few people believed it would be sustainable or viable,” he says. On its first trading session there were two listed shares and a market capitalization of $20 million. Today there are 49 listed companies, there are listed bonds, and the market cap is just under US$3.5 billion, with 110,000 retail and institutional investors, and 45% of ownership held by non-Palestinians (including expatriates). “Given the circumstances the exchange has had to go through, it has done relatively OK,” says Aweidah.

But liquidity, which stood at $1.5 billion in 2008, has drifted between $350 and $450 million ever since, which is not enough to attract much more investment or listing, though Aweidah is quick to point out that it’s better than regional peers like Bahrain or Tunis.

It can also be a struggle to persuade domestic businesses to list. Bassim Khoury, CEO of Pharmacare, a pharma business in Ramallah, recalls that he didn’t actually want to list. “For a variety of reasons,” he says. “One, unfortunately the stock market is not one that works on fundamentals, but on perceptions and speculations. Two, we don’t want to raise any cash.” He did so because law required him to do so, as a company with more than 50 shareholders.

Moreover, his route to market ended up with a fight with the Capital Markets Authority that ended up in the Supreme Court, the highest constitutional court in Palestine, when the CMA sought to fine him for delaying his listing in order to wait for a shareholder to sell out (he won). But today, he paints that court case as a victory for Palestine. “It shows we have a system that works!” he says. “If I were in their shoes I would promote it [the case]. It shows Palestine is a country with a legal system where investors who have concerns can go to court.”

So how to grow from here? At the time of our interview, Aweidah was fine-tuning the exchange’s final application to be part of the World Federation of Exchanges, and hoped (after a couple of technical bounce-backs of earlier submissions) to become a full member in October. “It’s not a big deal in terms of the impact on business,” he says. “But it’s a very big deal because you are being evaluated by your peers. There are 350 exchanges in the world. Only 54 are full members of the federation.” The exchange is also on the watchlist for inclusion on the FTSE Frontier index and a similar vehicle from Standard & Poor’s (though not MSCI). “I am optimistic, because if it was purely based on qualitative and technical criteria, we would qualify,” he says. “The reason we don’t is size and liquidity.” But size and liquidity are unlikely to come without index inclusion prompting more investors to look at the market. “We need it for visibility, credibility, and eventually for passive funds who follow those indices.”

And credibility is the whole point: it legitimizes the whole claim for statehood. “It’s important and it’s part of the struggle,” he says. “The fact that there is a successful and well-regulated stock market is part and parcel of the struggle of the Palestinian people for liberation and independence. If there was a Palestinian state we would be at least 10 times as big within five years.”