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The collapse of the Palestine Securities Exchange (PSE), often known as the Nablus stock exchange, from a daily turnover of $12 million in 2005 to about $6 million on a good day in 2007 is not just a matter of chance. In the same vein, the crash in value of the 36 companies traded on the PSE from a combined value of $4.5 billion to $2.8 billion over the same period is not only a matter of bad luck.

In the past two years the Palestinian market has responded to the political and security situation, and the quick investors who saw what was coming pulled their money out and moved it to more promising places.

Other, less lucky or slower investors, found themselves trapped by the lower share prices. "We were so optimistic then, we thought we could change the world," Dr. Hasan Abu-Libdeh, the executive chairman and CEO of the PSE, recently said in Stockholm, referring to a meeting we held 13 years ago on the outskirts of Ramallah.

The Nablus exchange was established in 1997 as part of the wave of euphoria then. The Palestinians were leading their economy to rapid growth and Palestinian investors from the diaspora were showing their faith in the young and coming economy. They invested in the first companies traded in Nablus, and the name of the new market's index was the politically charged Al-Quds Index (Jerusalem index in Arabic).

And then came the second Intifada, which caused the Palestinian economy to collapse.

Since it was founded, the PSE has served as a barometer for what is happening in the territories. Just like every other good stock exchange, it has powers of prophecy. For example, when the Palestinian unity government was established, the market dropped. Investors voted with their legs - and their money - as they forecast that not much of anything good would come out of the new cabinet for the Palestinians.

Abu-Libdeh himself left public service a year ago and took up his present post running the PSE. In an interview with TheMarker he said: "Indications are that daily trading volume will continue to decrease, since we cannot bring in foreign investors, who are waiting because of the political situation between Israel and the Palestinians, the intra-Palestinian situation, and due to the lack of progress in the political process," explained Abu-Libdeh.

"Foreign investors, in particular from the Arab world, have found better investment opportunities in markets such as Egypt and Morocco," he added.

"Moreover, most Palestinians investors are small and have no additional liquidity that would allow them to continue to invest. This is a result of the political and economic closure of the Palestinian economy, of the Palestinian Authority's inability to pay salaries and of the withdrawal of the donor nations. Everything affects the liquidity of the market," he explained.

In spite of the difficult political, economic and security situation, Abu-Libdeh is working on increasing the number of firms listed on the exchange. According to the law, 90 companies are supposed to be listed, but not all have good enough numbers. There are firms who have very few shares available for public trading, and others whose financial results are not sufficiently impressive. Therefore, according to Abu-Libdeh's plan, the number of companies listed on the PSE will grow to about 4, and the other 45 will trade on a new list of over the counter stocks, starting at the end of this year or at the beginning of 2008.

An analysis of the PSE's current 36 firms by sector shows a relatively large amount of diversity: 22 percent provide services, 19 percent are in banking, 31 percent are in industry, 11 percent in insurance and 17 percent are investment companies.

An analysis by market value puts the services sector in first place with 37 percent of the entire market's value.

The record year for the Al-Quds Index was 2004 when it reached 1,128 points. In 2005 it already crashed to 605 points, and in 2006 it dropped to 522 points.

"The market reflects the internal political volatility," stated Abu-Libdeh. Since Hamas rose to power the market has been negative. "I do not think we will see a rise as long as the present situation remains the same," he explained.

The PSE is controlled by Palestine Development & Investment Ltd. (PADICO), which is owned by a number of leading Palestinian businessmen. Padico is a holding company which has eleven subsidiaries in the industrial, real estate, tourism and capital market sectors.

Aside from being the largest company traded on the exchange, Padico also owns the Palestinian phone monopoly Paltel. Padico has a market value of $600 million, about a quarter of the value of all the shares traded on the PSE.

Abu-Libdeh thinks there is no conflict of interest stemming from the fact that the owners are traded on their stock exchange.

One of Abu-Libdeh's plans is to turn the exchange itself into a publicly traded company. In the meantime, the Palestinian government is preventing such a move, and contacts with the Hamas economic minister are continuing over the matter.

"We are working on a plan to increase the number of companies listed on the exchange in order to attract more investors. In addition, we are presenting models of electronic trading, and because of the currency crisis in the territories we are considering creating new investment methods such as stocks and bonds of municipalities and companies," he explained.

Business in the territories is conducted in the dollar and the Jordanian dinar.

In order to interest foreign investors, the Palestinians remind investors that their market is completely open, as opposed to other markets in the Arab world.

Anyone can buy any share, including Israelis - a number of whom have invested in the PSE.

There is also no limit on the percentage of foreign ownership of companies. Nevertheless, Abu-Libdeh noted that "although the Palestinian exchange is 10 years old, there is still no Palestinian stock market culture. Some of the companies are family-owned, and the families are still afraid of losing control," he explained.