Emerging markets may be back in favour but few investment markets are as exotic as Palestine.
Delayed peace talks, trouble in the Golan Heights, terrorist activities: investing in the country is probably not for widows, orphans, or those of a nervous disposition.
Political risk has existed in the country since Biblical times; not even Bill Clinton has been able to solve it in two weeks.
But just as Beirut’s rebuilding is probably the most unlikely economic success story of the last Five years, some investors are betting that its troubled neighbour in the Levant will yield equally good results.
Initial signs are good: the Palestine Securities Exchange is up 16% this year, making it one of the best-performing stock markets in the Middle East.
The signing of the Oslo Agreement in 1993 was a breakthrough in the peace process though change has been gradual rather than immediate.
Israel has withdrawn its forces from the Gaza Strip and parts of the West Bank but the economic activity in these areas has been disappointing. Optimists are betting that Israel’s latest government – elected in 1999 – will increase the chances of reaching a Final peace settlement.
But just as Palestine is separated from Israel, so the Gaza Strip and the West Bank are divided. Economic conditions in the Gaza Strip are particularly grim. Unemployment is nearly 20%; 36% of the population live below the poverty line; GDP per capita is only $1,200 per year.
“For Palestinians in the Gaza Strip, the only option is working in Israel,” says Ayo Salami, equity analyst at Nomura. In contrast the West Bank has lower unemployment of 9%, GDP per capita of $1,700 and less than 10% of the population lives below the poverty line.
The West Bank may be better off but Palestine is still one of the poorest countries in the Middle East. It is not surprising that it is the only country in the world with more of its population living outside its borders than within. This diaspora is helping to fuel economic growth as money Flows back into the country.
Palestine operates in three currencies: the Jordanian dinar, the Israeli shekel and the American dollar. The preferred currency of choice is the dinar, partly for patriotic reasons but also because Jordan has the largest population of Palestinians. But everyone is at ease with the different currencies. Street kids will quote you three different prices depending on the currency and it is suspected that they can also write you a forward contract in dollars if you so wish.
If this mainly young population can create a vibrant economy then there is no better investment opportunity in Palestine than Padico, the country’s largest company. It has operating subsidiaries in telecommunications, real estate, tourism, poultry and electronics.
It has invested more than $500 million in the region, working with international partners such as the European Investment Bank, International Finance Corporation, Intercontinental Hotels and Samsung.
Padico’s big attraction is Palestine Telecommunications (Paltel), which has a 20-year licence to develop and manage telecom services in the West Bank and Gaza Strip. This deal is exclusive for the First ten years of the Fixed telephone network, with a Five-year period for the cellular GSM network.
The company has installed more than 500,000 Fixed lines. Commercial launch of the mobile phone network began at end-1999.
Padico also has established the Palestine Securities Exchange. There are 24 companies listed, with a total market capitalization of about US$1 billion. It also has stakes in real estate, tourism (less silly than it sounds, for this includes sites in Jerusalem), and stakes in industrial projects such as a poultry farm, a plastics factory and a television assembly factory. In the pipeline is a 140-megawatt electricity generating station in partnership with Enron, the American company, and a mortgage company.
But why should investors be tempted by this Liberian-based company with subscribed share capital of less than $175 million? Palestine’s development depends on the goodwill of the Israeli government, not a quality for which the executive is renowned. There is little legal protection and no securities law (although one is being drafted in cooperation with the World Bank).
Salami says that the peace dividend will positively affect the Gaza Strip by allowing Palestinian workers greater access to the Israeli economy. In addition, business confidence will return to the region. If you buy this story, you may as well buy Padico.
“With Padico accounting for around 30% of the total capitalization of the Palestine Securities Exchange, investing in Padico is effectively a call option on Palestine,” says Salami.
