The Palestine Exchange (PEX), which makes a market for shares in 46 local companies with a combined market capitalization of $2.9 billion, is on its way to becoming a publicly traded stock itself.
Shares in the PEX will begin trading on the Ramallah-based exchange April 4, the 15th anniversary of its founding, after Palestine Development & Investment Company, PEX’s biggest shareholder, has sold the first of a planned two million shares. When all the shares are sold, a process that could take up to a year, the public will hold about 20% of the exchange.
The initial public offering (IPO) comes at a tough time for the PEX and the other stock exchanges of the Middle East and North Africa, which have seen prices and volume decline in the face of the global financial crisis followed by the political turmoil of the Arab Spring.
But Ahmad Aweidah, PEX’s chief executive officer, told The Media Line that the Palestinian bourse had weathered the crises relatively well and that investors in the IPO stood good upside prospects that would be leveraged by new revenue streams that the exchange is developing.
“You’re coming into the exchange when it’s at bottom of the cycle, so the only way is up from here on,” Aweidah said. “In spite of the decline in trading revenue in the last three years, we are not making huge losses. We’ve grown other revenue sources aside from trading and we’ve managed to keep expenses more or less stable in the last three years.”
Last year, the only two Arab stock markets to show a positive return were Iraq (starting from a very low base) and Qatar (enjoying booming natural gas exports). PEX’s benchmark Al-Quds index fell 2.6%, but that made it the region’s third-best performer. Most markets recorded double-digit percentage drops, with Cairo and Damascus plunging close to 50% as political upheavals wreaked havoc on their economies.
The market environment has improved somewhat in 2012. Trading volume on the PEX grew to a monthly average of 16 million shares in January and February, up from an average of 15.4 million all of last year. The Al-Quds index is up about 1.5% so far this year, although it is lagging behind many of the region’s markets that have rallied in 2012.
“I would say I am cautiously optimistic,” Aweidah said. “We’ve seen a slight turnaround in regional markets, but I believe 2012 will be overshadowed by the Arab Spring and here by the financial crisis of the Palestinian Authority.”
Donor aid for the PA’s current and development budgets last year fell $500 million short of the $1 billion the PA had expected, according to an International Monetary Fund (IMF) report. That reverberated through the economy as the PA delayed paying suppliers and borrowed heavily from local banks. Unless donor countries come through with more aid, the PA’s fiscal situation looks no better for this year, the IMF said.
Meanwhile, the IMF estimates that GDP growth slowed to 5.7% last year, a relatively high rate by global standards but by far less than the 9% rate the economy was enjoying in 2008 through 2010.
The slowdown in trading has hit the PEX’s bottom line. Since a stellar year in 2005, when the exchange posted net income of $8.7 million on gross revenue of $11.8 million, the numbers have been in decline. PEX slipped into losses in 2010 and 2011, although Aweidah emphasized that the profits from the years prior exceeded the combined losses by 20-fold.
The exchange is, nevertheless, determined to go ahead with the IPO. It was converted into a public shareholding company in 2010 and by law must list its shares and increase its public shareholding. But the listing will also be good for the exchange and its operations, Aweidah said.
“We did it mainly to increase transparency and credibility, and enlarge the shareholder base,” he said. He said he hopes the example would rub off on the Palestinian corporate sector as “a model for other public shareholding companies.”
Although publicly traded stock exchanges are common elsewhere in the world – such as NYSE Euronext, which owns the New York Stock Exchange, and the London Stock Exchange Group, which owns the LSE and Borsa Italiana – the PEX will be only the second Arab bourse to list its shares after the Dubai Financial market. But Dubai is 80% owned by the government while PEX is entirely in private hands.
Besides Padico, a holding company, its other shareholders are Snabel Trading & Investment Company; and Euromena Partnership Company.
The PEX aims to expand and diversify its revenue, half of which came from trading last year. It is developing its post-trading services and taking over clearing and settlement from the central bank, said Aweidah. It has begun charging for financial data and plans to offer network-hosting services for a fee to exchange members, he added.
Trading activity may also get a boost if the PEX succeeds in winning frontier market status from MSCI, the global stock market benchmarking company. Last year, just over a third of the trading was done by foreign investors and that would likely rise if MSCI gives it the upgrade because fund managers typically weigh their country holdings according to the MSCI weighting.
“We are waiting. We meet all the criteria, and we are a public shareholding company. The issue they have is market cap,” said Aweidah. MSCI demands that at least two companies have a market capitalization of over $450 million and currently only one meets the criterion, but three others are approaching that level. “If there’s a rally in the market,” he said, “then we will be there.”