One of Palestine s many bittersweet economic achievements since the Oslo peace accords is the establishment of the Palestine Securities Exchange. Based in the troubled northern West Bank city of Nablus, the exchange shares the reality of a brutal military occupation alongside the never-ceding steadfastness and resilience of the Palestinian community s desire to build a normal life and a free market economy. The establishment of the PSE was a sweet achievement in that it was set up under conditions of a yet-to-be nation state that was, and continues to be, under Israeli military occupation. The number of listed firms has grown even while the economic strangulation of the Palestinian economy by Israel and the international community continues unabated. The bitterness of the PSE is that many of the inherent structural weaknesses of the Palestinian economy and governance style are reflected within it. This leaves significant room for improvement. There are only 35 companies listed on the PSE: six from the banking sector, four from the insurance sector, eight from the investment sector, 10 from the manufacturing sector and seven from the services sector. Shares are listed in either US dollars or Jordanian dinars. Total market capitalization for the first eleven months of 2007 was $2,452,808,833 with the number of transactions 149,538, the value of traded shares $759,787,133 and trading volume reaching 283,218,841 shares. There are nine Palestinian brokerage firms located throughout the West Bank and Gaza Strip. The market s blue chip stock is the Palestine Telecommunications Company (PALTEL); the Palestine Development & Investment Ltd. (PADICO) is the second largest company listed on the PSE. Despite a noticeable decline of the trading shares value of these two companies during the last period, their shares remain the most traded shares in the PSE and they command 78 percent of all traded shares in the market. Over the past two-three years, growing numbers of non-Palestinian institutional and individual investors have entered the market in a significant way, one in particular from Kuwait that also acquired partial ownership in one of the leading brokerage firms. It is relevant to note that PADICO owns a controlling amount of PALTEL shares and owns many of the traded companies listed on the Exchange, as well as the PSE itself. Until recently, the chairman of PADICO was also the chairman of the PSE, but more recently an ex-minister was appointed as chairman and also serves as the CEO. Plans to list the PSE itself on the exchange, opening a significant percentage of shares to public investment, have been floating for years but haven t materialized yet. It has been repeatedly noted that non-institutional trading happens more on the impulse of individual traders following wealthy businessmen s (sadly all are men) investments rather than as a result of investors having any real data, analysis, knowledge or understanding of the firms they are investing in. Several leading investors have taken advantage of this market weakness to list more and more companies on the PSE, knowing that investors will follow them without understanding the core business of the companies they are investing in. The result of this lack of individual shareholder savvy is that many IPOs are over-capitalized from the start, giving these start-up firms extra cash to create and trade securities portfolios in parallel to their main business. As the Palestinian market collapsed from the weight of the past seven years of intensified conflict and a depreciating dollar, many publicly traded firms quietly registered their traded portfolio losses with little repercussion from shareholders, who did not question why their investments were turned around and for investments in security portfolios instead of serving an intended business plan. The Palestinian investment community is still in need of more media work, newsletters, workshops and seminars to educate it about the importance and risks of investments in securities. Specifically, the market is in dire need of independent, financial- and business-specific journalists that have the courage to undertake bold investigative reporting of the dealings of publicly traded (as well as privately held) firms. Recently, however, the Palestinian Authority set up a Capital Markets Authority to regulate the PSE and the brokers, a proper and strategic step forward. Brokerage firms play a pivotal role in spreading awareness among the community of investors, and their role is of great importance in attracting small investors to buy shares with their savings. However, a troubling development is the role of insider trading via the brokerage firms. With a weak legal system and a nascent regulatory authority, insider trading is taking its toll. When Gaza was overrun by Hamas in mid-2006, the market hardly even reacted, an indication that market dynamics are not the only factor at play in sustaining the stability of the PSE. Prior to the creation of the CMA, the PSE at the outset of the second intifada placed a five percent upper and lower limit on daily trading to protect the market from collapsing. Since the CMA was established, the most significant action taken to date was to investigate and publicly announce wrongdoing in one of the major brokerage firms. In a December 2007 front-page advertisement, the CMA announced serious infractions by the United brokerage firm and listed steps the CMA is taking to rectify the situation. The firm had been caught executing sale and purchase deals of shares in the Jordanian financial market through a Jordanian firm by using the names of several people without their knowledge and issuing fictitious vouchers on their accounts. For Palestine, this was a bold public move that was welcomed in the marketplace and created a positive buzz that white-collar wrongdoing (in the financial markets and throughout the market as a whole) may start to be seriously and aggressively pursued and hopefully prosecuted as well. The PSE was created to address the need to attract long-term funding for productive infrastructure projects in Palestine as well as the savings of Palestinians inside and outside the country. It is considered one of the emerging securities exchanges in the Arab world, but operates under the extraordinary circumstances of having to mitigate market risks that are embedded in a 40-year ongoing military occupation. The Palestinian economy has not yet reached a state where it can be separated from the Israeli economy due to the nature of the Paris economic protocol that supplemented the Oslo agreement and linked Palestinian financial and economic institutions with their Israeli counterparts. The PSE has been able to persist under the difficult economic conditions caused by the Israeli occupation practices that affect all areas of economic activity, including finance and business. But addressing the weaknesses of the PSE must come within the framework of the entire Palestinian problem. Sam Bahour is a business consultant based in Ramallah/El-Bireh. He participated in the effort to list two national firms on the PSE: PALTEL and PLAZA. This commentary is published by DAILY NEWS EGYPT in collaboration with bitterlemons-international.org
