Lower oil prices leading to renewed urgency to diversify economy and improve Algerian exchanges

For nearly two decades Algeria’s securities markets have remained in a nascent state of development, with relatively few investors or listed securities. But as authorities look to alleviate pressure on state finances and generate new sources of capital and investment opportunities for public and private enterprises alike, the country’s under-sized capital markets appear a promising option. In March 2016 Prime Minister Abdelmalek Sellal spoke of the need to “awaken” Algeria’s securities exchanges, and the announcement of the planned privatisation of several state-owned companies followed.

Alongside anticipated private sector listings, officials’ renewed focus on developing the exchanges should have made 2016 a banner year for the markets. However, after a highly successful private listing, an initial public offering (IPO) from a state-owned company met with only limited interest. As a result, the government is exploring alternatives.

Market Landscape

Algeria’s capital markets are overseen by the Société de Gestion de la Bourse des Valeurs (SGBV), established in the mid-1990s to establish and manage the Algerian secondary markets. The SGBV was created amidst the country’s partial pivot away from a centrally planned economy. The corporate stock exchange and bond exchange opened in 1999 and currently lists five stocks: state-owned pharmaceuticals manufacturer SAIDAL, hotel operator EGH El Aurassi, private insurer Alliance Assurances, beverage maker NCA Rouiba and private pharma producer Biopharm, which listed in April 2016. A Treasury bill (T-bill) exchange opened in 2008 and a small and medium-sized enterprises exchange launched in 2012, though has no entrants as yet.

The SGBV is jointly owned by Algeria’s six public banks, private banks BNP Paribas and Société Générale, and local finance advisory firm Tell Markets. As the SGBV’s shareholders, these nine firms are the only brokers authorised to conduct trading on the primary exchange. They are also allowed to trade on the T-bill exchange, alongside several domestic insurers. Trading hours for the corporate exchanges are held Monday and Wednesday mornings, and every morning of the work week for the T-bill market.

Oversight

All trading is overseen by the Commission for the Organisation and Supervision of Stock Exchange Operations (Commission d’Organisation et de Surveillance des Opérations de Bourse, COSOB), the nominally independent state regulator that in fact also reports to the Ministry of Finance. The COSOB monitors legal and regulatory compliance and issues new regulations as needed. It is also the market’s gatekeeper, responsible for approving all securities prior to their listing, and for licensing brokers and other market actors. The COSOB also oversees the work of Algérie Clearing, the markets’ central depository. Only national residents are currently allowed to own shares on the Algerian markets.

Growth Targets

Even before the fall in hydrocarbons revenues in mid-2014, authorities had been speaking of the need to render capital markets more dynamic. However, the liquidity squeeze that hit the financial sector in 2016 (see Banking analysis) has added new urgency to this push. “The Treasury and the state no longer possess the budgetary means to finance development projects at the same level as in recent years, which has resulted in a redistribution of funding channels and underscores the need to develop financial markets,” Abdelhakim Berrah, president of the COSOB, told OBG.

Officials have identified the market’s small size as a particular obstacle and long discussed floating shares of state-owned enterprises to achieve a critical mass in the markets that could entice both new listings and investors. In March 2016 the Algeria Press Service (APS) reported that the SGBV expected to reach an ambitious AD100bn (€827.2m) in capitalisation by mid-2016, AD1trn (€8.3bn) within five years and eventually 25% of GDP, although there is still much work to be done to reach those objectives.

Indicators

Market capitalisation in Algeria’s exchanges has been modest since their inception, particularly relative to the size of the economy. Capitalisation of the primary equity market grew 4.3% in 2015 to AD15.4bn (€127.4m), according to SGBV figures. The Biopharm IPO pushed the market cap as high as AD53bn (€438.4m) in May 2016, but it slipped by the end of the third quarter to AD46bn (€380.5m). Capitalisation at the end of the third quarter of 2016 stood at roughly 0.33% of non-hydrocarbons GDP, far below the market values in neighbouring countries. Tunisia’s stock market capitalisation represented 20.8% of its 2015 GDP, and Morocco’s closed at 45.8% of GDP, even after a particularly slow year of trading.

With the exception of a single anomalous trade involving a transfer of AD1.2bn (€10m) in Alliance Assurances stock between a shareholder’s accounts, the market saw nearly 140,000 shares traded in 2015, worth just AD59.9m (€495,000). The SGBV’s DZAIRINDEX basket, which includes the stocks listed on the equity market, finished 2015 up 8.52% on expectations of new listings in 2016. At the end of third quarter in 2016 the DZAIRINDEX closed less than 1% above its 2015 finish.

The corporate bond market saw trading end as issues of state hydrocarbons producer Sonelgaz and real estate developer Dahli SPA reached their term and have not yet been followed by new issues. The T-bill exchange was more animated, accounting for some 93.1% of all transactions conducted on the exchanges in 2015 by value, according to the SGBV’s 2015 annual report. The issue of AD66.2bn (€547.6m) in new Treasury debt helped drive activity on the T-bill exchange, and brought its 28 bonds to a total coupon value of AD437.7bn (€3.6bn) at the end of 2015. After two more bonds reached term in 2016, 26 issues were traded on the T-bill market, with a total value of AD414.2bn (€3.4bn) at the end of the third quarter of that year.

Public Offerings

In 2016 capital markets were defined by the widely diverging experiences of two IPOs – the first since 2013, when private firm NCA Rouiba joined the exchange. In March 2016 Biopharm opened a subscription worth 20% of its capital, or some AD6.3bn (€52.1m), and listed on the exchange the following month. On the eve of the IPO opening, the firm, which is owned by Luxembourg-based Capital Trust Group’s EuroMena private equity fund, released a performance report showing it had a 15% market share in Algeria and 45% earnings growth over the previous three years, and announced that Banque Extérieure d’Algérie (BEA), which underwrote the IPO, had guaranteed full subscription.

The initial 10-day subscription period saw a slow uptake, during which time only 10% of the shares on offer were snapped up; however, following an extension of two weeks, Biopharm ultimately saw all of its available shares sold to a mix of 3309 investors, of which 149 are companies and eight institutional investors, such as banks and insurers, according to a March 2016 report by local news site TSA. When Biopharm joined the Algiers equity exchange in mid-April 2016, it more than tripled the exchange’s capitalisation overnight, bringing new investment into the previously lethargic market and highlighting a particular successful campaign by both Biopharm and BEA to manage the IPO.

The second IPO attempt in 2016 saw more limited interest. In mid-May 2016 APS reported that state-owned cement company Société des Ciments d’Aïn El Kebira (SCAEK) launched a public offering, again underwritten by BEA, to increase its capital by 35% through the sale of 11.84m new shares. Furthermore, it was segmented into two categories — 60% for legal entities and 40% for persons. SCAEK planned to use the anticipated AD18.95bn (€156.8m) investment to open a new production line at its facility near Setif, but by the end of the 30-day subscription period, the firm had only subscribed 5% of shares on offer, according to a June 2016 Reuters report. This was only worth 2.7% of the cement producer’s value, well under the 20% equity threshold required by the COSOB for public listing, according to a June 2016 report from local daily Liberté. Reflecting the lower levels of liquidity in the banking sector, the paper observed that “banks were noticeably absent” from the SCAEK subscription lists; only 3% of the shares earmarked for financial institutions were subscribed at the time of the cancellation. The listing may have been affected by an expected sovereign bond issuance.

Privatisation

SCAEK was the first IPO attempted by one of eight state-owned firms that the State Shareholdings Council (Conseil des Participations de l’Etat, CPE) selected for partial privatisation in 2013. Primarily envisaged as a means of stimulating the stock market’s development and encouraging transparency, those privatisations took on a new urgency in 2016 as oil revenues dwindled. Construction materials firm Cosider Carrières, two more public cement companies, bank Crédit Populaire d’Algérie (CPA) and insurer Compagnie Algérienne d’Assurance et de Réassurance (CAAR) were all expected to follow SCAEK onto the markets by the end of 2016. Officials had also continued to hint at floating shares of public utility Algérie Télécom.

Despite the results of the SCAEK public offer, the need to boost the markets, raise capital for state-owned enterprises and instil incentives for improved corporate governance still stands, and the CPE is likely to move forward with additional listings in the coming years. Furthermore, with dozens of state-owned enterprises – whose even partial listings would still bring a sizeable amount of capital to the market – there is plenty of scope for the government to add new firms to the CPE’s shortlist.

Sovereign Debt

The sovereign debt market has seen a spate of activity in recent months, as the government looks to shore up its finances in light of the slow global oil and gas market. The National Economic Growth Bond was announced in March 2016 and launched a month later on April 17. The bond issue, offered at rates of 5-5.75% annually with a maturity of three to five years, was intended to replace lost hydrocarbons revenues and mitigate the state’s budget deficit. No purchase limit was set for the six-month offer period.

To encourage would-be buyers, authorities launched a major public mobilisation campaign, including media spots, a dedicated website and promotion by public banks, insurers and post offices, with thousands of branches nationwide requisitioned as points of sale. Among the targeted investors of the issuance were informal economic actors, who hold an estimated $50bn that authorities are eager to integrate into the formal economy. After five months of sales, the authorities announced that the bond had raised AD317.6bn (€2.6bn).

Branching Out

In a June 2016 newsletter from the National Insurance Council, Brahim Djamel Kassali, president of the Algerian Union of Insurance and Reinsurance Companies, said insurers had purchased AD15bn (€124.1m) in the bond in the first two months alone, a figure he expected to double by the end of the six-month subscription period.

While the sources of the funds have not been disclosed, many of the investors come from the larger institutions in the formal sector. In July 2016 Algeria’s primary business owners’ association, the Forum des Chefs d’Entreprise (FCE) held a “mobilisation evening” that saw members pledge a reported AD152bn (€1.3bn) in just a few hours. There is as yet no word as to whether the government will seek to list the new bonds on the T-bill exchange.

However, Olivier de la Guéronnière, director-general of insurer Amana, told OBG, “The bond offered a very strong rate of return, and we responded.” But perhaps more importantly for the life insurer, he said, “We are watching this experience to see how it proceeds, to determine how we might launch retirement savings products.”

While a number of retirement products were available on the market in the early 2000s, De la Guéronnière said few companies offer them today due to the difficulty of developing appealing products under current market conditions and investment regulations. This situation contrasts with that in many economies, where retirement savings – and long-term life segment products in general – are a pillar of capital markets. In Algeria, as authorities seek funds to limit budget deficits and stimulate the capital markets’ development, retirement products may soon earn a second look.

Corporate Debt

The corporate bond market has been quiet following the end of listings by Sonelgaz and Dahli SPA in January 2016, but there is ample room for further growth. In February 2016 Noureddine Boutarfa, former CEO of Sonelgaz and current minister of energy, told daily El Moudjahid that the company will need to raise AD1.1trn (€9.1bn) by 2018 and AD4.2trn (€34.7bn) by 2025 for infrastructure upgrades to keep pace with burgeoning domestic demand. Salah Khebri, the minister of energy, suggested in May 2016 that they are readying a domestic bond issue, but Boutarfa also said the government is prepared to go to international financial markets if the necessary sums cannot be raised locally.

In May 2016 the APS reported that public mortgage refinancer Société de Refinancement Hypothé- caire is preparing bond issues, while the COSOB mentioned in its 2015 annual reports that leasing firms Maghreb Leasing Algérie and Société Nationale de Leasing had similar plans.

Building Capacity

In what has proved an eventful year for Algeria’s capital markets, the authorities have continued to reinforce market capacity. In November 2015 the COSOB licensed two new SGBV shareholders, Société Générale and Tell Markets, and one new promoter, Dey Capital. In early 2016 the SGBV also launched a process to upgrade its stock trading software, which both listed companies and investors, including the FCE, have criticised as being excessively slow and a barrier to trading and investment. Market officials expect the new platform to be ready for use in 2017. A similar upgrade to the Treasury’s trading software in late 2015 led immediately to a substantial jump in trades, according to the SGBV’s 2015 annual report.

Efforts are also under way to render the markets more accessible to retail investors. In May 2016 Banque de l’Agriculture et de Développement Rural opened the country’s first stock market kiosk at a central Algiers branch. In line with new professional development requirement for staff announced by the COSOB, CPA and BEA bank employees have undergone training from the regulator in preparation for opening other market kiosks.

In March 2016 the SGBV launched a mobile phone app for tracking exchange performance, and in May of the same year the SGBV announced that online trading will be available in early 2017, an advance that could dramatically expand access.

Outlook

Improved capacity and access to the markets, along with efforts to stimulate new investment, can help the markets in 2017 to achieve the growth expected in 2016. Further liquidity contraction in the financial sector is likely in 2017, which can raise borrowing costs across the economy and lend the capital markets new appeal in the eyes of corporate executives. The bond market is thus well placed to see future growth. The markets may witness stronger development if officials embrace more innovation and expansion of financial products – such as sukuk (Islamic bonds) and collective savings instruments – and reconsider barriers to foreign investment.