Jordan restructuring and privatising its stock exchange to enhance performance

As part of an ongoing economic reform programme aimed at boosting private sector investment, the Jordanian government is planning to reform the Amman Stock Exchange (ASE), with the long-term goal of partial privatisation through an initial public offering (IPO). Although prevailing economic conditions will likely prevent a near-term IPO, and a government reshuffle in mid-2016 will see the administration take control of the bourse to implement these reforms prior to any IPO, the ASE’s privatisation offers significant potential benefits and should help improve investor sentiment, market capitalisation and liquidity once it is complete.

Stock Market Struggles

Long ranked as one of the most open stock markets in the MENA region, the ASE has struggled in recent years as rising regional turmoil and falling oil prices have negatively affected investor sentiment. Between January and October 2015 the ASE lost 4.5% of its value, and it ended the year down 1.35%, according to a 2016 report from Bank Audi. Its annual turnover-to-market-capitalisation ratio stood at 19% in 2015, against a regional average of 69% and a global average of 123%. Nonetheless, many indicators recorded a positive performance, with Reuters reporting that the overall value of deals between January and October 2015 exceeded JD2.6bn ($3.7bn), a 43% increase over the same period in 2014. Foreign ownership of the exchange has also remained at the same levels as before the global financial crisis, with roughly 50% of the market’s $25.3bn capitalisation foreign-owned as of late 2015. Arab investors, including sovereign funds, GCC investors and other Arab nationals, account for a 37% share of the ASE’s market capitalisation, while the rest is held by non-Arab investors, including Western funds.

Privatisation Announcement

In October 2015 Nader Azar, CEO of the ASE, told Reuters that the bourse will be partially privatised, with the long-term goal of offering a stake to investors through an IPO. According to Azar, turning the publicly owned bourse into a company will pave the way for new strategic partners, including exchange operators like Deutsche Bourse, Euronext or the New York Stock Exchange, among others, which would like the chance to take a stake in one of the Middle East’s oldest exchanges.

Benefits: The move follows similar plans in the region and could bring with it significant benefits, according to a 2014 report studying four regional exchange ownership transitions undertaken or considered in Turkey, Egypt, Palestine and Kuwait. The OECD noted that private ownership of exchanges could allow them to deal with the political sensitivities surrounding consolidation, which many economists expect would result in Arab capital markets attracting more international attention. “Discussions with large institutional investors and asset managers reveal that MENA markets are still not getting as much attention in their portfolios as Asian or Latin American markets. In this sense therefore, the potential ownership transitions of Arab exchanges might be positive towards real industry consolidation and the search of synergies and complementaries,” the report said.

The ASE has already made progress in addressing legal and regulatory issues that made it difficult to establish new funds, with the kingdom’s first sukuk, (Islamic bond) a JD85m ($119.5m) issuance by Al Rajhi Cement, taking place in 2011, followed by two government issues worth JD75m ($105.5m) and JD34m ($47.8m) in May and October 2016. The change of government in June 2016 has thrown the timeline for the ASE’s planned privatisation into question, with Jordan’s Council of Ministers announcing on July 10 that it plans to “reinvigorate” the ASE through a restructuring programme that will transform it into a government-owned company prior to privatisation. “After completing the transformation process, the ASE has the choice to go public through an IPO at a later stage at the right time,” Azar told OBG. “The IPO will be set based on market conditions and after obtaining the necessary approvals.”