The bourse seeks to expand operations while new listings are expected

Having been launched a decade and a half ago, Algeria’s stock market remains modest in size, with a market capitalisation equivalent to around just 0.1% of GDP – a result in part of the country’s surplus liquidity and accessible bank lending.

However, recent years have seen the first equity listings by private sector companies on the exchange, and plans by the government to float stakes in eight state-owned firms should have an enormous impact on capitalisation. The bond market, which has been quiet in recent years, may also receive a boost in the form of a loosening of regulatory requirements under consideration, and at least one new debt listing is set to take place in the near future.

Market Overview

Algeria’s stock market was founded in 1998 and is operated by Société de Gestion de la Bourse des Valeurs (SGBV). The company is owned by eight Algerian banks – the country’s six public banks and two French-owned private banks, BNP Paribas and Société Générale – with licences to act as market brokers; a condition of receiving a broker’s licence is to take a stake in SGBV. Société Générale is the most recent bank to receive such a licence, having done so in November 2013 and following BNP Paribas in 2011. The country’s central depository is known as “Algérie Clearing” and is owned by the six state-owned banks, as well as two of the four companies that are currently listed on the country’s equity exchange.

Total market capitalisation stood at AD14.8bn (€137.6m) as of late October 2014, up from AD13.8bn (€128.3m) at the end of 2013. Current capitalisation levels represent more than a doubling in market size since 2009, though growth in the years since 2011 has been relatively slow.

However, the bourse is seeking to dramatically expand its operations, with plans to raise market capitalisation to €7.35bn within five years, based on a target of 50 listed companies, a key plank of which will be plans to list stakes in a number of major state-owned firms. “I believe we can exceed these targets if the listing of publicly owned enterprises goes to plan,” Yazid Benmouhoub, CEO of SGBV, told OBG.

The secondary market remains very small, with individuals dominating the equity market and institutions making up the majority of bond issue transactions. The total value of equity transactions in 2013 was AD49.1m (€456,630), based on the sale of 120,681 shares, up from AD36m (€334,800) and 49,471 shares in 2012 but down strongly on 2011 figures, when transaction values spiked to AD185m (€1.7m). One issue affecting liquidity in addition to the small number of shares listed is that it is currently against the law for public banks – which are highly liquid and could therefore be a major source of market movement – to make losses on an investment, which strongly discourages banks from buying shares on their own accounts.

Equity Market

There are currently four companies listed on the bourse’s equity market. Two firms – pharmaceuticals manufacturer SAIDAL and agribusiness firm Eriad Setif – were listed in 1999; although the latter delisted in 2006. The management company of the Hôtel El Aurassi also held an initial public offering (IPO) in 1999, floating a 20% stake on the market, and a listing in January 2000. SAIDAL’s floating stake is also 20% of its equity.

This spate of sales was followed by a long period of quiet on the equity side, with market activity subsequently moving to the bond market. However, 2011 saw the IPO of Algerian insurance firm Alliance Assurances, making it the first private company to increase its capital through the exchange.

The most recent equity listing on the bourse was that of privately held agribusiness firm NCA Rouiba, which held an IPO of 25% of its capital in March 2013, achieving a subscription rate of 106%, before listing on the exchange the following June. The IPO was promising as it represented the successful sale of a stake in the firm by a foreign private equity investor, opening the door for more such transactions in the future. “The NCA Rouiba listing was modest but important for the local capital markets. However, a market with fundamentals like Algeria should see one listing a month, which is not happening,” said Adel Si-Bouekaz, managing director of Algerian investment bank Nomad Capital.

SME Exchange

In order to increase the range of companies able to list as well as to improve financing options for smaller firms, 2012 saw the creation of a new equity board reserved for small and medium-sized enterprises (SMEs), in addition to the creation of a separate market for Treasury bonds. SME exchanges have been rolled out in a number of countries across Africa in recent years, including Egypt, Morocco and Nigeria, to help foster growth among a segment that often constitutes one of the largest sources of employment and revenue.

“The SME market is a very important one,” Benmouhoub told OBG. “The government attaches a lot of importance to the creation of new firms and wants to give them an opportunity to raise finance, in particular companies that have trouble raising funding via traditional methods.”

Firms listing on the exchange benefit from relaxed regulatory requirements; most notably, they are obliged to float just 10% of their capital, compared to 20% for companies on the main exchange. However, as of yet no SMEs have taken the plunge, which is not surprising given that many existing SME boards elsewhere on the continent have yet to reach a critical mass of listings either. A local advertising firm, Avenir Decoration, in May 2013 signalled its intention to hold an IPO, which would make it the first SME to list on the exchange; however, speaking in September 2014 Benmouhoub told OBG that the firm had yet to submit a formal application to do so.

State-Owned Enterprises

One of the main impediments to the development of the bourse is the modest size of the corporate private sector, which is sandwiched between large state-controlled firms that access blue-chip lending rates from public sources, and SMEs.

However, the authorities are seeking to list shares in government-controlled companies to boost the development of the exchange, as well as to reduce its own financing obligations. In 2013 government body the Council of State Holdings gave the green light for the floatation of eight state-owned firms, namely Algérie Télécom Mobile (better known by its brand name, Mobilis), Crédit Populaire d’Algérie bank, insurance firm Compagnie Algérienne d’Assurance et de Réassurance, quarry operator Cosider Carrières, water and sanitation firm Entreprise Nationale des Aménagements Hydrauliques, and three cement factories that belong to the state-owned cement holding firm Groupe Industriel des Ciments d’ Algérie. Separately, another government-owned firm – household electrical goods producer l’Entreprise Nationale des Industries de l’Électroménager – in October 2013 indicated that it was also making preparations for an IPO.

The size of the stakes to be floated in the firms has yet to be decided; however the companies will be required by market regulations to float stakes of at least 20% of their capital, and Benmouhoub told OBG that he believed the stakes to be sold are unlikely to exceed 30% of each firm.

Such market flotations should enormously increase the exchange’s capitalisation. However, a number of steps still need to be taken before they can take place, including the approval of each firm’s general assembly for its respective listing as well as valuations of the companies, which Benmouhoub told OBG would likely be time-consuming. Speaking in September 2014, he said that SGBV hoped that one or two of the listings would take place before the end of the year, with the rest to follow in 2015.

Bond Market

The retail bond market saw a spate of activity earlier in the past decade but has been quieter as of late. State-owned oil and gas firm Sonatrach launched the market with a debt issue in 1998, which was followed by national airline Air Algérie’s bond listing in 2004. Subsequently, the period between 2006 and 2009 saw a comparative burst of activity with six debt issues, all but one of them by state-owned firms such as Algérie Telecom and state electricity network Sonelgaz. However, all but one of these have since matured – most recently, the Sonelgaz/14 issue earlier in 2014 – leaving just one bond currently listed on the market, namely privately owned real estate and hospitality firm Dahli’s seven-year AD2.36bn (€2.2m) issue, which has a coupon of 6.25% and is due to mature in 2016.

However, Benmouhoub also told OBG that he believed that there would be new debt listings on the market soon. Indeed, speaking in September 2014, Chedly Zaoun, chairman of the board at Maghreb Leasing Algérie, told OBG that the firm planned to issue an institutional five-year AD2bn (€18.6m) coupon bond before the end of the year, having arranged the necessary bank guarantees. This was previously due to take place in 2012, although the process was delayed as the firm sought to meet all of the requirements of market regulator the Commission for the Organisation and Oversight of the Stock Market (Commission d’Organisation et de Surveillance des Operations de Bourse, COSOB) in relation to the requirements for such guarantees.

The prerequisites for such agreements have previously acted as an impediment to the further development of Algeria’s capital markets as arranging them can be difficult and expensive. However, according to Benmouhoub, COSOB is considering dropping the requirement, with a ratings system planned to be put in place instead, which could significantly boost bond issues. “Replacing the need for guarantees would be a very promising avenue for invigorating the debt market,” he told OBG.

Reform

One of the key elements of the authorities’ efforts to boost the fortunes of the bourse has been a joint project by COSOB and the UN Development Programme to reform the country’s financial markets. The recommendations of the project’s diagnostic phase, which ran from 2011 to 2013, are now being implemented – a process that Benmouhoub said could last five years or more. The main recommendations to have come out of the process include increased training for staff at the bourse itself as well as other market actors; the modernisation of the market’s trading system; and the exchange of expertise with other institutions.

In line with the last of these, SGBV in March 2014 announced that it had signed a memorandum of understanding to further increase cooperation with the pan-European exchange Euronext. According to Benmouhoub, the agreement involves three major elements, namely cooperation and training, which will bring Euronext experts to work alongside local industry players and provide the necessary training to bourse staff, as well as potentially to employees of brokers and COSOB; learning from Euronext’s research into financial innovation, which Benmouhoub told OBG would be particularly helpful as regards the development of the SME exchange; and mutual promotion and awareness-raising. In May 2014 the company signed another such agreement with the Tunis Stock Exchange. “Tunisia has certain similarities to Algeria but has a more developed stock exchange and has worked hard to increase national awareness of financial markets, which is very important to us,” said Benmouhoub.

Under the reform programme there are also plans to upgrade the bourse’s information and IT systems. Benmouhoub in September told OBG that SGBV expected a decision from the General Directorate of the Treasury in the Ministry of Finance, which is financing the initiative, on how to proceed with the project before the end of the year.

Incentives

The government have long been intent on working to develop a more appealing framework in order to significantly boost activity on the exchange. With the implementation of various reforms beginning in 2013, including several incentives for SMEs, the bourse hopes to encourage dozens of new listings. Indeed, development of SMEs has been a major area of focus for the government more generally, as it works to diversify the economy away from a reliance on hydrocarbons, and allowing such firms to obtain funding via the stock exchange would do much to support the segment.

The authorities are also continuing to work to encourage more companies to list on the exchange through various incentives and regulatory changes. Most recently, under the 2014 finance law, firms that list benefit from a reduction in taxes on profits, corresponding in size to the amount of capital they have floated – for example a firm that lists a 30% stake in its capital will receive a 30% reduction in its tax bill. The government has also set up a fund in order to help SMEs cover the cost associated with listing, something that Benmouhoub suggested should be extended to cover more types of companies. “Other non-fiscal options for increasing the number of listings include legislation obliging firms to list a proportion of their capital once it reaches a certain size, though at the moment these remain just topics of discussion,” he told OBG.

Raising Awareness

Like many emerging markets throughout the region, one of the problems facing the development of the bourse is the lack of a local stock market culture and of awareness more generally regarding the financing and trading opportunities offered by the exchange, in particular outside of the country’s capital. In order to raise such awareness, SGBV since December 2013 has been conducting a series of seminars around the country, working with local branches of the Chamber of Commerce and Industry to identify firms with listing potential and invite them to the events. As of September 2014, the firm had conducted three such gatherings, one in the western city of Oran and two in the north-east of the country, which around 450 firms have attended in total. “There is a tangible interest amongst the companies to which we have spoken regarding the possibilities offered by the bourse,” said Benmouhoub.

One of the key planks of the outreach programme is to explain to SMEs, which tend to be family owned liabilities companies, how to change their status to that of joint stock companies (sociétés par actions), which is a requirement of firms that list on the exchange. “Family owned firms are often suspicious of opening up their capital,” said Benmouhoub, “however, there is a new generation of business owners coming up that understands the opportunities offered by the market.”

Outlook

A number of proposed reforms, such as plans to remove the requirement for bank guarantees for bond issuers, should help to further boost market activity in coming years. However, in the near term the outlook for the development of Algeria’s stock exchange will depend most heavily on the potential listing of equity stakes in major state-owned enterprises on the bourse, which would enormously increase the market’s capitalisation and would also likely boost liquidity.

Should the government’s plans to increase activity on the exchange succeed, a number of economic sectors should offer particular promise in terms of listings. “Construction and public works firms are among the most likely to come to the market in coming years given the sector’s substantial requirement for funds; so too are telecoms firms, as projects in the industry require large amounts of capital investment,” Benmouhoub told OBG, while further citing both the insurance and agribusiness industries as strong contenders for listings in the near future.