Interivew: Tarik Awad
Daily trading volumes at present fluctuate between $10m and $15m; what will it take for these to increase once more to pre-crisis levels?
TARIK AWAD: At present, the market is dominated by retail investors and investment fund regulations. To increase trading volumes, taxation needs to be reformed to help develop the institutional investor base. Further, some existing institutional investors should be encouraged to become more active again in the market, but this will require additional research. Increasing transparency and providing access to information from a centralised data source would also encourage these investors and promote market liquidity. Dormant institutional investors include the Social Security Investment Fund and several banks; they could possibly mandate that local asset managers put small equity portfolios under operation which would enhance liquidity in the market. Investor education is also necessary at the level of both institutional and retail investors.
Opening an account is onerous for foreign investors, and this acts as a deterrent to market entry. Making this easier and increasing the availability of basic hedging instruments would encourage foreign investors and enhance market liquidity. I think that more research coverage would also be beneficial, as it would encourage investors, particularly foreigners, to take a more active role in the market. Last but not least, regulators should increase the minimum free float and facilitate the issuance of global depository receipts for key stocks.
What are the reasons for the low level of initial public offering (IPO) activity in the kingdom?
AWAD: The main reason is the restrictive regulations that govern public offering prices. For example, limiting IPOs to par value adversely affects successful firms that trade at premium to par. In addition, limiting the acquisition price to the book value of the acquired firm would again hurt successful firms with substantial intangible assets such as goodwill, reputation and trademarks, reducing their desire to make IPOs. Another factor would be the diminishing market liquidity that results in a higher cost of capital, which could reduce demand for shares and therefore deter companies from listing.
What measures can be taken to develop a secondary market for government bonds?
AWAD: Diversification of the investor base and promotion of market makers are key factors needed to develop a secondary bond market for treasuries. Extending the maturity and range of issues through regularly scheduled offerings is another contributing factor. The absence of an on-the-run yield curve is a challenge, and a regular issuance calendar across the maturity spectrum would help. Similarly, the Central Bank of Jordan should ensure a system is in place for market makers to make firm bid-ask quotes. Also, new instruments such as floating rate notes and sukuks (Islamic bonds) need to be introduced to encourage more liquidity.
What is the situation in Jordan’s corporate debt markets, and what changes do you hope to see?
AWAD: There is considerable room to deepen the corporate bond market. Blue chips should be encouraged to issue and corporate treasurers should be educated about the benefits of accessing the market and diversifying sources of finance. The availability of ample bank financing has also acted as a deterrent to issuance, and the lack of secondary trading in government debt markets is an obstacle when it comes to pricing of corporate issues using the government as a benchmark.
On the demand side, I believe that reform is needed to enable the setting up of fixed-income funds. One key obstacle to the setting up of funds, in addition to existing regulations, is the taxation anomaly, whereby a fixed-income fund would be subject to 14% taxes, versus a 5% tax for individual investors on interest earned. Also banks need to be educated about the benefits of having an active corporate bond market for diversification, and in helping them with the management of their single obligor exposure limits and credit risk.
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