SARG HIGHLIGHTS PROBLEMATIC STOCK MARKET TO

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 005061 SIPDIS SIPDIS NSC FOR MORCHESE, NEA/ELA, TREASURY FOR LEBENSON E.O. 12958: DECL: 10/19/2016 TAGS: ECON EFIN EINV PREL SY SUBJECT: SARG HIGHLIGHTS PROBLEMATIC STOCK MARKET TO REASSERT PROGRESS ON ECONOMIC REFORM REF: DAMASCUS 00669 DAMASCUS 00005061 001.2 OF 002 Classified By: Classified By: Charge d'Affaires Michael Corbin, reasons 1.4 b/d ¶1. (C) Summary: The SARG is moving ahead on its efforts to open a Syrian stock market by formalizing the establishment of the new exchange. Some contacts assert that Syria could open the exchange in 2007 and that it will provide many benefits to the Syrian economy, including, stimulating capital growth, redirecting financial resources to key sectors, and encouraging foreign investment. However, there are many critics in the financial sector who maintain that Syria does not currently have the capacity or financial framework to develop an operational and transparent exchange that can help spur economic growth. The SARG's promotion of the stock market reflects the broader effort it has made over the past few months to reassert that it is successfully progressing on economic reforms even in the face of international pressure. End Summary. ¶2. (C) In the past few months the SARG has appeared to be speeding up its efforts to establish a stock market, at least on paper. In June 2005, President Asad ratified the Syria Security and Exchange Commission Law that created a commission charged with drafting a law to establish the stock market exchange. However, he did not name the commission until January 2006 (reftel). Progress has sped up recently. In August 2006, the Prime Minister issued several decisions pertaining to the stock market's operation. In September 2006, President Asad approved the law that establishes the stock market, completing the legal framework for the exchange. The Syrian Finance Minister Mohammed Hussein recently announced the exchange will start operating in 2007. Abdel Kader Husrieh, who helped develop the stock market framework, seconded Hussein's assertion to Econoff, claiming that with the legal framework now in place there are no remaining obstacles significant enough to force a further delay to the exchange opening. ¶3. (U) Over the past month the SARG has utilized the government owned press to highlight its efforts to ensure the stock market's success, asserting that it is following what it terms a conservative stock exchange model and announcing broader financial reforms. Deputy Prime Minster for Economic Affairs, Abdallah Dardari, announced that a number of measures will be instituted once the stock market opens to counter speculation, including, limiting the number of times a share can be traded to once per day, basing the value of shares on the assets of the issuing company, and not allowing any share's value to increase by more than 2.5 percent during any one day. The SARG has also undertaken a series of broader reforms related to the tax structure that critics had pointed to as an underlying impediment to encouraging shareholding companies. The SARG cut the corporate tax rate for the third time in recent years, down to 28 percent, and also offered a special tax rate of 14 percent for public shareholding companies. ¶4. (C) President Asad is reportedly personally interested in speeding along the establishment of the stock market. Mohammed al-Imadi, Chairman of the Syrian Security and Stock Market Board, told the Charge that he was receiving significant pressure from above to move forward quickly on the stock market. However, even with the reforms outlined above and with significant presidential interest, contacts in the financial sector discount the likelihood of an operational stock market in 2007 and are skeptical about the ability of the exchange at present to promote real growth in Syria. ¶5. (C) Even Chairman Imadi, a regime loyalist who spoke enthusiastically about the stock exchange's potential, appeared in private to be uncertain about his capacity to move forward quickly. He is operating with a limited staff and in a temporary building while the permanent site for the stock exchange faces indefinite construction delays. Wissam Merhej of Deloitte and Touche underscored the operational impediments to the stock exchange, telling Econoff that the SARG has been unable to acquire even the software necessary for running the exchange, due in part to U.S. sanctions under the Syrian Accountability Act. DAMASCUS 00005061 002.2 OF 002 ¶6. (C) Beyond the operational impediments, financial sector contacts agree that the tax structure reforms and the stock market guidelines do little to address the underlying financial barriers necessary for a successful exchange market. These barriers include a hostile foreign investment environment, the limited number (approximately 40) and quality of shareholding companies, and the lack of a transparent regulatory structure. Riad Obegi, Chairman of Banque Bemo Saudi Fransi commented to us that the lack of a regulated auditing structure prevents the transparency required for investor confidence in a stock market system. Making a related criticism, Merhej told us that while the Ministry of Finance had organized a committee to look at auditing issues, there has been no movement on this issue in several months. Walid Abdel Nour, Deputy General Manager of Byblos Bank, echoed others when he commented to us that the stock market would take at least five years to become truly operational. ¶7. (C) Comment: While the SARG has taken some of the easy steps toward establishing a stock market, the underlying issues critical to its success, including the regulatory system and an open investment environment have not yet been addressed. Many contacts in the financial sector argue that even if the stock market does open in 2007, it is more likely to invite insider trading than contribute significantly to private sector growth. The stock market has been under development for several years, and the recent push by SARG leadership on this issue would appear to have less to do with implementing real structural change than it is a desire to be seen as moving forward on economic reform. Nonetheless, it is significant that Asad, whether motivated by sincere reformist instincts, especially in the economic sphere, or merely by the desire to defend his reputation for such sentiments, or possibly a mixture of both, has supported this forward investment in the stock market. While limited and halting as a reform gesture, in the current environment in which Syria finds itself, standing back and doing nothing might easily have been the natural course for a regime under diplomatic pressure and isolation. CORBIN