JORDAN,S STOCK MARKET INDEX CORRECTION RAISES

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 001850 SIPDIS SIPDIS E.O. 12958: DECL: 03/01/2016 TAGS: EFIN ECON JO SUBJECT: JORDAN,S STOCK MARKET INDEX CORRECTION RAISES CONCERN ABOUT MARKET DYNAMICS Classified By: Ambassador David Hale for reasons 1.4 (b,d). ¶1. (U) SUMMARY: In the last two weeks, the Amman Stock Exchange (ASE) suffered a 25% net drop before leveling off, tracking similar declines in neighboring bourses. Described by most Amman-based analysts as a "much-needed correction," the decline exposed some vulnerability in the Exchange. With 201 companies listed, the small ASE suffers from unbalanced market share -- Arab Bank shares make up over 45% of the exchange -- and a relatively low level of capitalization. The recent influx of new real estate-based IPOs and a sale of new shares in Arab Bank caused a shift in capital on the exchange. In a market with limited liquidity and few product offerings (e.g., no derivatives),this shift in capital along with institutional sell-offs in regional stock exchanges precipitated a two-week, drawn-out decline in the index. The government's intervention starting March 6 pumped liquidity and demand into the market, reversing the downward trend. END SUMMARY. A MUCH-NEEDED CORRECTION -------------- ¶2. (U) While Jordan's economic indicators remain strong, the Amman Stock Exchange had by the end of 2005 showed signs of overvaluation. The average price-to-earnings (P/E) ratio for all companies listed on the ASE was 23, more than double the corresponding P/E ratio for all emerging markets of 11.7, and higher than the S&P 500 average of 18.5. Recognizing that the market was overvalued, many investment firms had started selling positions in December 2005, according to JordInvest CEO Ahmad Tantash. ¶3. (U) While the prosperity of oil exporting countries has spilled over to Jordan contributing to its 7% growth in GDP, it has also made the country, and in turn the ASE, heavily dependent on regional foreign investment. The largest gains in the exchange in the last two years have been related to banking and real estate, two areas in which regional players have poured in capital. Real estate alone has generated over US$700 million in trading volume on the ASE in the current year. Central Bank of Jordan (CBJ) Deputy Governor Faris Sharaf told EconOff March 8 that working with trickle-down wealth from oil-driven spending and trading heavily in real estate created a market that was "overvalued" and dominated by "irrational exuberance." As other Arab stock markets started to undergo corrections in recent weeks, the ASE followed suit. AN EXCHANGE WITH LOW CAPITALIZATION, SHALLOW LIQUIDITY -------------- -------------- ¶4. (U) The ASE is marked by low capitalization compared to most markets in the region. Market capitalization of US$37 billion is a small fraction of the over US$1 trillion that is represented by GCC markets. Many analysts argue that there was not enough capital in the market to overcome the capital being withdrawn by regional investors. Though many new, small investors entered the market in recent months, the capital they brought was heavily weighted towards the Arab Bank and recent IPOs. Tantash pointed out that, as institutional sell-offs occurring throughout regional markets started to force the ASE index downwards, there was not enough capital to sustain the prices of other stocks. In his analysis, "new initial public offerings and capital increases withdrew liquidity from the market causing the ASE index to drop." COMMENT: The 25% drop in the ASE index indicates more vulnerabilities than just a normal correction, including the exchange's dependence on regional markets. Unlike oil-rich countries, awash in liquidity and readily able to fuel a comeback, the ASE operates in the context of constrained liquidity. Unless this lack of liquidity is addressed through a more efficient exchange, the next correction could have a more severe impact. END COMMENT. FEW TOOLS ON HAND FOR INVESTORS -------------- ¶5. (SBU) An additional issue that compounded the liquidity problem is the limited number of products the Jordan Securities Commission (JSC),the ASE's regulator, allows in the market. The JSC does not offer the capability to sell short, or offer futures, options, and derivatives, all products available in a mature exchange and instrumental in generating liquidity. Additionally, the JSC does not allow for margin trading, again restraining the injection of liquidity. COMMENT: Margin trading could, however, compound the problem in a market with so many first-time traders. END COMMENT. AMMAN 00001850 002 OF 002 ¶6. (C) In sharing some critical remarks on the JSC, Sharaf remarked that they had "failed to regulate the ASE properly, restricting funds and products" that would have eased the liquidity crisis. The Prime Minister's Economic Advisor Safwan Batayneh offered a similar assessment, saying the "ASE has been a blind spot for the government" leading to a situation where there "is no depth and no supervision of the stock exchange." ¶7. (C) Sharaf pointed to new regulations that the CBJ authorized March 6 that now allow banks to re-purchase from 5-10% of a company's shares as a means to bolster share price and bring in liquidity. Crediting the early 5% rise in the exchange on March 7 to this new regulation, Sharaf said that it was a temporary solution. In his opinion, the JSC will have to focus on improving the regulatory framework in the long-term to fix some of the fundamental vulnerabilities in the stock exchange. ¶8. (U) The JSC's recent decision to allow margin trading as of March 15 is one such regulatory fix. Additionally, its promise to license investment funds that have been waiting to enter the market is a positive sign. ¶9. (C) According to Batayneh, in response to demonstrations at the JSC by small investors who invested late in the market and lost heavily, the government instructed the Social Security Corporation, a government-owned entity and one of the largest investors in the stock market, to purchase large amounts of open orders causing another 5% rise in the stock market on March 8-9. ¶10. (C) COMMENT: This much-needed correction of a stock market that has seen over 200% growth in the last two years, much of it due to high oil prices, has exposed frailties and risks inherent in an institution that is otherwise considered a harbinger of Jordan's growing economic liberalization. While the overall picture for the economy looks promising, a further decline in share prices may be expected in 2006 based on most analysts, opinion that the market remains overvalued. How steep the decline is depends partially on what the JSC does to improve the ASE's regulatory framework, and what it does to educate the common investor. ¶11. (U) Read all of Amman's Classified cable traffic at http://cables.state.sgov.gov/ncddos/cable/cou ntry/JOR/ home.html. HALE