PEX 2020: What's next for Palestine's capital market?
Established in 1995 and headquartered in Nablus, the Palestine Exchange (PEX) has made it through some of the most challenging times capital markets have seen, overcoming geopolitical and economic forces that are global, regional and local in nature.
Ahmad Aweidah, CEO of the exchange, explained that the 2009 global financial crisis hit the exchange’s revenues and, while operations were sustainable for some time, by 2013 the decision was made for a major digitization overhaul. Headcount was reduced by almost half, and there are targets in place for PEX to become an entirely paperless company by 2020.
This is being accomplished by building an inhouse business process management platform from scratch, which handles the entire business of the exchange internally, resulting in a reduction of operating costs by 40%, he said.
Moreover, being nimbler and leaner has also led to the reopening of a Ramallah office, putting the capital market closer to major stakeholders and listed firms.
In terms of the region, PEX “is not the worst pupil”, said Aweidah, adding that the Middle East/North Africa and Gulf regions have seen Arab exchanges buffeted by a low oil price and geopolitics, with Saudi Arabia in the spotlight. For PEX, “2019 has not been a good year”, with trading revenues down by almost 40%, and Q3 profits down by almost a third at $459,000.
These results are indicative of the cash crunch Palestine is just emerging out of, even as the financial figures of its 48 listed firms start to give a clearer picture of the fallout.
“The VAT issue (that) came up with Israel, that had a huge impact on liquidity in the general economy, so it’s normal for that to be reflected in the activity on the exchange,” said Aweidah. “The biggest challenge now is that there is little incentive for companies to list in a shallow market, you need velocity, liquidity.”
Changing that situation would require “something big” to happen, economically or politically, and Aweidah is not betting on it, with 2020 being budgeted for more of the same: “We are not forecasting rosy pictures because there are still big challenges ahead. Even though the VAT issue has been resolved and the liquidity crunch has been alleviated, still, challenges remain. As long as there is no window on the future nobody really knows what’s going to happen, so there’s no clarity, neither politically nor economically for the foreseeable future…uncertainly is the name of the game.”
Palestine’s capital market, he added, is becoming a harder sell to international investors despite a global investing trend towards emerging and frontier markets: “We are competing with so many other markets – Sri Lanka, Pakistan, Colombia – and there are so many opportunities right now, that the story needs to be compelling enough to have a fighting chance. This is not exactly the ideal situation for Palestinian companies to be pursuing investors externally for the time being.”
At the same time, there haven’t been any major outflows, and the level of foreign ownership in the exchange has stayed stable at 38%. And listed firms have held up well, he added, with accumulated profits at $188 million in 2018, in line with 2017, and with no major drop (-1%) in the first half of 2019 comparatively year on year.
What does a listed firm say?
Located in Ramallah, Palestine, the Arab Palestinian Investment Company (APIC) listed on PEX in 2014. Despite Palestine’s cash crunch, it’s Q3 results show total revenues at $609.1 million; a growth of 9.7% compared to same period of 2018. Net profits after tax amounted to $15.8 million year to date in Q3, up 34.6% year on year, while net profits attributed to APIC shareholders amounted to $12.8 million, up 32.7% year on year.
“It is a challenging environment, but we’ve maintained solid performance even in tough times,” said Fida Musleh-Azar, Investor Relations and Corporate Communication Manager at APIC. “The general economic situation in Palestine is really not that great, but if you look to companies listed on the stock exchange, they’re performing very well.”