Yemen: Stock Exchange Market [Archives:2000/33/Business & Economy]
August 14 2000
1- Providing suitable economic and investment environment. This depends on a number of circumstances and factors which altogether form the investment climate. This also requires a degree of economic stability, stability of prices, controlling inflation in economy and other indicators related actual rates of interest fixed according to supply and demand. In addition: there should be a realization of real rates in economic growth.
Economic reform program in Yemen has aimed at creating an economic ground to be a basis for the resumption of economic growth and activating investment and raising financial, monterey political efficiency. It tackled the most important financial and monetary discrepancies which economy suffers. It was relatively successful in controlling the monetary supply and reducing budget deficit to about 3% in the year 1998 and containing inflationary pressures. Inflation rate has dropped to about 9% in 1998 besides the success in liberating exchange rate and building foreign currency reserves amounting to around US$1.37 billion in 1997 as well realizing effective economic growth rate which reached 8.6%, 5.6%, 5.2% and 2.7% during the period 1995-1998 respectively. On the other hand, Investment Law offered a bunch of privileges, tax- custom exemptions, facilities and material and legal guarantees for national and foreign investments. The measures also included the development of Aden Free Zone, using its strategic position on the crossroads of international trade routes.
Nevertheless, there are shortcomings in some major infrastructure such as roads, communication, water and electricity. Moreover the infrastructure suffers from abnormal financial and monetary shocks and fluctuations such as budget deficits which shot up to 6% according to State budget assessments of 1999.
2- Provision of suitable legislative and legal structure which is a collection of laws and regulations and bylaws controlling performance of stock market whether at issuing or circulating them as well as registration of companies in the bourse and assessing their assets.
The suitability of the legislative and legal structure and invoking them in the creation of a stock exchange market are measured by two basic factors. The first is the existence of harmony between provisions of these laws concerning different aspects of issuing, circulation, devolving and investing of these stocks. The second is realization of balance and complement between the supervision and growth role for these legislations on the basis that the purpose of these laws is to organize the market and develop it in a way leading to realization of justice and credibility.
3- Presence of a number of companies having relations with the stock exchange market.
Success of the stock market necessitates existence of two types of institutions and companies operating in the securities market.
The first is companies concerned with money brokerage development and those with risk capitals and fund deposit administration. Other institutions run marketing and covering issues of stocks.
The second type of companies are those of general share which are considered the main source of stocks. In Yemen the supply o stocks is characterized by being limited owing to the nature of the structure of existing investment companies because most of these are closed family-owned companies or state-owned companies. In order to ensure their financial needs closed companies depend on their own resources and also their self-savings or refer to bank loans. On the other hand we find that government institutions too depend on capital transfers in State budget to cover their fundings.
Despite this, current economic developments and expected structural changes may contribute to the establishment of a stock exchange market. Here we may point to a number of possible factors which push towards the need to create a stock market.
a – Nature of the new directions of economic policy aimed at privatization of public and mixed sector projects, so these companies’ shares which shall be put for public subscription, shall relatively represent the biggest part of supply for the stock market. In this regard the Government intends to put its shares in a number of big companies in form of public subscription during the next three years.
b – Expected expansion in activity of the private sector:
Measures and policies of structural and economic reform aims at supporting and encouraging private sector and providing suitable atmosphere for investment, knowingly that State’s withdrawal from economic activity and reshaping its entry in economic life allows the private sector to steer the economic development and activate investment; subsequently the presence of an organized stock market shall assist in mobilizing savings and prepare them for funding the expected expansion in the growth of private sector by increasing supply of stocks in the market.
c – Some studies show that the private sector has moral incentive to put the shares of some public subscriptions belonging to companies and institutions and register them in the stock market when created. It aims by this at benefiting from facilities which it may get and to prove that the private sector may contribute in economic development programs.
d – The need to divert from issuance of short-term Treasury bonds into long-term stocks serving the purpose of actual investment. This calls for the creation of a stock market to realize long-term economic objectives.
It is worth mentioning that a World Bank mission had in 1999 carried out a survey of companies which possess the components for enrollment in the stock market and found out only six qualified companies.
4- Sufficient demand for stocks:
Despite economic measures and financial and monetary reform programs carried out during the past five years, actual demand for securities is still limited. Basically this is due to lesser demand for stocks, absence of markets for circulation of securities. Besides this there are other factors which hinder growth of demand for bonds which are:-
a – reduced size of gross local saving owing to lower individual incomes resulting from successive economic crises which effected economy . Equally the 90s observed a fall in the purchasing power of the local currency which led to the reduction in real income level. That period also observed a number of unsuitable economic circumstances which led to decreasing of economic activities, reduction in saving power both by the economy and individuals.
–drop of investment awareness; particularly towards the importance of receptacle and means of new investment, such as knowledge of bonds and the advantage of investing them besides the structure of investment companies.
c – reduction in investment revenues in this type of investments under availability of options and other substitutes characterized by relative increase in revenue such as investment in real estates and land and speculation in currency.
However, creation of a stock market may lead to a genuine growth in demand owing to the wide reforms in legislations, laws and institutions which, in turn, establish a convenient investment and economy working for attracting capitals and investing them.
Future of Small Enterprises
Farouk Al-Kamali
Taiz.
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