MUCH HAS CHANGED in the Syrian economy in the past five years. Privately owned banks and insurance companies have been reintroduced for the first time in more than 40 years, inward foreign investment levels have multiplied quickly and international retail brands are springing up in what used to be a virtually closed market.
One element of the country’s plan to move gradually towards a private-sector-driven economy has not yet materialized. The Damascus Securities Exchange (DSE) is a central pillar of Syria’s 2006–11 five-year plan, and would establish the first capital market in the country since the 1960s, when the old stock exchange – one of the first in the Arab world – was closed down as part of the wider nationalization of the economy.
Now, with signs that the regulatory bodies are preparing the ground for a launch early next year and a spate of firms queuing up for brokerage licences, the goal might be in sight. And with what is clearly a massive amount of latent liquidity both domestically and in the region, those expecting to do business in the new market will doubtless be hoping that good things come to those who wait.
The DSE has been on the drawing board for quite some time. It was officially announced in 2006 as part of a wide-ranging and ambitious economic restructuring blueprint – the 2006–11 five-year plan – that was drawn up under the auspices of the deputy prime minister for economic affairs, Abdullah Dardari, who is seen as an outspoken protagonist of economic reform.
The plan intended to move Syria away from what was essentially a centralized command economy to a more devolved system with greater private-sector participation. This included the establishment of a capital market, and the government duly set up a regulator, the Syrian Commission on Financial Markets and Securities, to start laying foundations.
Since then, various delays and hurdles have progressively pushed back launch dates for the DSE, even though there is clearly a desire at the top that things must move soon. "Before the end of this year, even if it means trading on a chalk board, I told them they have to start dealing," Dardari said in a local interview in mid-August.
Although some of the delays can clearly be expected in a country attempting to make a huge economic shift in a short time, others are more tangible.
"One problem regarding setting a date is that some aspects are out of the commission’s hands," says Bassel Hamwi, deputy chairman of the DSE and general manager of Bank Audi Syria, one of the first privately owned banks to be re-licensed.
"For instance, there is the serious issue of US sanctions, which is making it difficult for us to acquire some of the specialized trading equipment. But for us, the quality of the exchange is the most important thing and we are not willing to compromise. There is lots of expectation in the market and we are keen to have the first trade launched before the end of the year."
Keep it clean
A crucial question is whether the DSE will be able to avoid the sorts of problems that have so far held back other markets in the Middle East. Trading on most Gulf bourses, especially in Saudi Arabia, is widely considered to be driven by short-term speculation and hearsay instead of underlying fundamentals, with insider trading an unresolved issue. In neighbouring Lebanon, a lack of liquidity in a tiny market dominated by larger and institutional investors has hindered growth.
The Syrian authorities appear to be taking pains, however, to address the problems faced by their neighbours.
"We have benchmarked the regulatory framework against other regional stock markets before we have even started trading," says Hamwi. "We want people to feel comfortable investing in the market and keep speculation to a minimum."
According to Hamwi, upward and downward share price movements on the DSE will be limited by a daily circuit-breaker of 2% of the share price, while day trading will be banned completely. The regulator also seems keen on keeping a close eye on brokerages, with a legislative change introduced earlier this year requiring majority Syrian ownership for all financial intermediaries.
Although only two brokerages had obtained final approval from the SCFMS by August 2008, at least 17 more applications were in the pipeline. One of those includes Syria’s first Islamic financial intermediary, the Islamic Company for Financial Services and Brokerage, which is majority-owned by the Syrian International Islamic Bank. If the phenomenal early growth enjoyed by Syria’s new Islamic banks is anything to go by, brokerages should certainly do brisk business once the DSE opens.
If things go well they should also have something to trade. Abdulkader Husrieh, a partner at Ernst & Young Middle East in Damascus, says that the authorities have published draft listing conditions that are waiting to be adopted and fully finalized.
"All private banks, insurance companies and other financial institutions that have been established during the last five years should basically be qualified for listing," he says, "as they have proper financial reporting and governance structures, subject to minor changes that are expected due to the limiting conditions.
"Many companies should also be interested in listing due to tax incentives and the new Company Act No 33 of 2008, which was only issued last March. It cancelled closed joint stock companies and allowed establishment of public joint stock companies only. Nevertheless, the tax administration needs further reforms in order to improve confidence among businessmen that the levels of transparency required by the DSE regulations will not expose them to undue taxes."
With Syria’s private-sector fabric still dominated by family-owned companies, the regulators plan to introduce a two-tier market. Under the proposed system, a main market designed for well-established companies with a history of profitability and corporate governance will run alongside a parallel market targeting family-owned companies.
Hamwi explains: "The parallel market will have a lower requirement threshold and a less stringent onus on listings. We want to give a lot of family companies an incentive to list on the exchange, as many of these firms are extremely profitable but are still quite opaque, so this should prompt them to improve their transparency. We don’t really know how it will turn out yet, but it’s been specifically designed with Syria in mind."