On March 10, Syrian Finance Minister Mohamed Hussein rang the bell to launch trading at the long-awaited opening of the Damascus Securities Exchange (DSE). Despite its humble size, the DSE is yet another sign that Syria means business about the privatization and gradual liberalization of its state-controlled economy. Ever since President Bashar al-Assad came to power in 2000, the country has made significant progress in its aim to become a “social market economy,” reminiscent of China.
Initiated by presidential decree in 2006, the DSE is a public institution that, once it stands on its feet, is scheduled to be transformed into a private shareholding company. Six companies are currently registered on the bourse: Banque Bemo Saudi Franci, Bank of Syria and Overseas, United Group for Publishing, Advertising and Marketing, Arab Bank-Syria, Alahlia Company for Transport and Bank Audi Syria.
Four other companies have applied to be registered. The DSE expects some 15 companies with an estimated value of 28 billion Syrian pounds (SP) (or $600 million) to be listed by the end of the year, about half of which are active in the banking and insurance sector.
Run and regulated by the Syrian Commission on Financial Markets and Securities (SCFMS), the DSE consists of a “main” and a “development” market. For a company to be registered at the main stock exchange, it has to be more than one year old, have at least 100 shareholders and a minimum capital of $2 million. New or smaller firms are registered at the development market. Currently, two of the six listed companies are listed at the latter.
Slow start
Trading on the first day in the life of the DSE was largely symbolic, as only three transactions took place, in which 15 shares in Banque Bemo Saudi Franci worth some $350 changed hands. By March 19, trading had picked up some pace, as over 1,400 shares were traded with a value of nearly $11,000. Mainly due to the limited number of listings, the DSE is currently open just two days a week.
According to Bassel Hamwi, general manager of Bank Audi Syria and deputy chairman of the DSE, the Syrian bourse offers several advantages to the Syrian economy.
“First of all, it creates a much-needed platform for the some 8,000 shareholders of the six currently registered companies to sell their shares,” he explains. “Before, shareholders who wanted to sell their stocks had to find a buyer and come to the bank accompanied by a lawyer to make the deal, while today they can simply open an account at a brokerage firm.”
“In addition to the classic advantages stock markets offer registered firms, such as increased access to liquidity, the DSE will help transform Syria from a frontier market into an emerging market,” says Hamwi. “In the more distant future, we hope the DSE can provide the channel for the privatization of public companies.”
Five broker firms have been licensed and their number is expected to climb to 12 by the end of the year. Trading at the DSE is subject to strict restrictions. “The Damascus stock exchange will not be open to gambling or risk- taking,” SCFMS chairman Ratib Shalah told the SANA news agency. “Shares can only be traded by those who want to invest money, not for speculation.”
Shares are not allowed to rise or fall by more than two percent during a day of trading, and cannot be bought and resold on the same day. Shorting and leverage are not allowed. Foreign investors are required to maintain their holdings with a licensed custodian and are not allowed to re-sell shares within a period of six months. The latter mainly serves to avoid instability due to the influx of ‘hot money’.
“These are temporary measures,” Hamwi says. “We hope that they will evolve, as the market evolves. The margin of two percent, for example, may prove too tight in the future and may need to be broadened.”
The long delay
The DSE has only just begun to function, nearly three years since Presidential Decree No. 55 was issued in 2006. The reason for the delay lays at the heart of the Syria Accountability and Lebanese Sovereignty Restoration Act (SALSRA). Passed by the US Congress in 2003 with the aim to fight global terrorism, the SALSRA bans the export or re-export of American products to Syria, with the exception of food and medicine.
As a consequence, specialized products such as electronic trading systems have been difficult to obtain. The same has been true for items such as Boeing aircraft spare parts. With an eye on air passenger safety, however, Washington recently allowed a shipment of aircraft parts to enter Syria. As the DSE was not able to obtain American- made products, it started negotiations with Paris-based Euronext and OMX, a Swedish-Finnish financial services firm. Yet these efforts were not fruitful, as Euronext and OMX were bought by the New York Stock Exchange Group and Nasdaq in 2006 and 2008 respectively. “Especially the latter was a major setback as negotiations with OMX had been ongoing for almost a year,” says Hamwi. “Eventually, the DSE managed to acquire a state-of-the-art system used in eight markets worldwide in late 2008.”
Despite these setbacks, most experts agree that SALSRA has failed to directly damage the Syrian economy. Indirectly, however, the trade embargo caused many European firms to be rather reluctant to invest in Syria, as American officials would remind them of the possible negative consequences of doing so. The DSE is widely perceived as the next step on Syria’s path to develop and enhance the role of its private sector. Syria’s state reserves have witnessed a downturn in recent years, mainly as a consequence of the decline in oil production. A decade ago the country’s wells produced some 600,000 barrels per day (bpd), today they are good for less than 380,000 bpd. Consequently, the state has sought new means to boost the economy, especially in terms of boosting the role of the private sector.
Following the collapse of the Soviet Union, Syria’s road to a new economy started as early as 1991, when Investment Law Number 10 was adopted, which introduced tax holidays for foreign investors and provided for the repatriation of overseas profits. The process picked up pace with a series of measures introduced since the inauguration of current President Bashar al-Assad in 2000. A crucial step in transforming the Syrian economy from a centralized socialist system to a Chinese-inspired social market model was the modernization of the country’s financial sector with the legalization of private banking in 2001, a move that has been overwhelmingly successful. Although it took until 2004 for the first private bank to open its doors, today there are roughly one dozen operating, while a handful of others have obtained licenses and are set to start operations later this year.
Banking on success
Deposits in Syrian private banks increased from some $9.4 billion in 2005 to $14.3 billion in 2007, which represents some 35 percent of total deposits. Five years ago, most foreign tourists changed their foreign currencies on the black market to avoid the official exchange rate set by the state. Today the Syrian pound fluctuates, while ATM machines and credit cards have become common.
The Governor of Syria’s Central Bank Adib Mayaleh, announced at a March economic summit in Kuwait that the government is considering allowing foreign investors a controlling stake in financial companies. So far, foreign shareholders have been permitted to own more than 49 percent of certain Syrian industrial ventures, but the same does not hold true for financial services firms. The authorities hope that investments in private banks will help to expand the industrial, tourism and real estate sectors.
In addition, the Syrian government adopted a series of measures to attract foreign investments, as a means to stimulate social and economic development. According to the World Bank, foreign direct investment in Syria amounted to $885 million in 2007, an increase of nearly 50 percent compared to 2006. Most foreign investors hail from the Arab world, Turkey, Iran and China.
Syria’s success in attracting foreign capital and the increased role of the private sector is illustrated by the rapid growth of the country’s industrial cities. Following the completion of several feasibility studies in the late 1990s, construction started in 2001 of three industrial cities at Sheikh Najjar (4,412 hectares) near Aleppo, Hassia (2,500 hectares) near Homs, and Adra (7,000 hectares) near Damascus. The government acquired the land, installed the necessary infrastructure in terms of roads, water and electricity, before selling the land to both Syrian and foreign investors, who are exempted from a range of taxes and custom’s duties.
By the end of 2007, a total of 1,162 hectares had been sold for industrial use in Sheikh Najjar, 838 hectares in Hassia and 1,680 hectares in Adra. Some 162 companies had also started production in Sheikh Najjar. In fact, according to Khalil Mouases, director of industrial cities and zones at the Ministry of Local Administration and Environment, Sheikh Najjar met with such success that it is likely be completed by 2012, instead of 2020. The warm welcome has prompted the authorities to announce the establishment of eight more such industrial estates.
The right ingredients
The recipe for the cities’ success has not just been cheap land and facilities, but also Syria’s relatively cheap and well-educated workforce, low energy prices and the country’s strategic location between the EU, Turkey, Iran and the Arab world. Syria has also signed the Greater Arab Free Trade Agreement and free trade agreements with Turkey and Iran.
Although state-owned companies continue to play an important role in Syria’s economy, over the past decade the private sector has become the main contributor to the country’s GDP, which is perhaps best illustrated by the pharmaceutical industry. While in the early 1980s, there were two state-owned pharmaceutical plants that produced enough medicine to meet 15 percent of domestic demand; in 2008 there were 52 pharmaceutical firms that met 90 percent of domestic demand. With these developments in mind, it should come as no surprise that the Syrian authorities have earned praise from the International Monetary Fund, which concluded that the Syrian government has taken crucial, albeit slow, steps towards liberalization, which will enable Syria to deal with the consistent decline in oil reserves.
“We are quite bullish about the Syrian economy, which is diversified and has a lot of potential,” saysd Hamwi. “If properly regulated, we think the DSE will increasingly be able to mirror the state of the Syrian economy.”
