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Amman, Jordan T: +962 6 566 6476 F: +962 6 566 6376 Amman Stock Exchange: The Way Forward | SEPTEMBER 2017 2 EXECUTIVE SUMMARY................................................................................................................................... 4 INTRODUCTION ............................................................................................................................................. 6 THE CONCEPT OF LIQUIDITY .......................................................................................................................... 8 THE JORDANIAN CAPITAL MARKET: SOME BASIC INFORMATION ..............................................................11 THE JORDANIAN STOCK EXCHANGE: THE LIQUIDITY ISSUE ........................................................................15 SUMMARY OF FINDINGS AND RECOMMENDATIONS .................................................................................17 REFERENCES ................................................................................................................................................20 Amman Stock Exchange: The Way Forward | SEPTEMBER 2017 3 Stock markets provide economies with a number During its initial stages, the market had modest of financial services which promote real figures. For example, in 1978, the number of economic growth. This is why, the number of listed firms, and the market’s capitalization to stock exchanges around the world has increased GDP ratio were equal to 66 companies and 36 from around 50 in 1975 to more than 170 by the percent respectively. By the end of 2016, the end of 2016. ASE has 224 listed firms, and 63.2 percent market capitalization to GDP ratio. The Jordanian government called for the During the past 10 years, the performance establishment of a stock exchange in 1975. The of the market in terms of stock returns has Central Bank of Jordan (CBJ), in collaboration been rather disappointing. The behavior of with the International Finance Corporation the price index during the period 2000-2008 (World Bank Branch), examined the idea, and on was highly volatile. What is more the 1st of January 1978 the Amman Financial disappointing, however, are the consistent Market (AFM) was established. losses realized since the year 2008. During the period (2008-2016), the cumulative Since its establishment, the AFM witnessed a percentage change in the price index was number of changes. These include, for example, equal to -57.9 percent. Within this context, the June 2000 implementation of the Electronic it is also worth noting that in 2016, the Trading System, establishment of the Amman closing market prices of 102 listed Stock Exchange (ASE) in 1999 as a non-profit companies were less than one Dinar (less independent institution, and the 2017 ASE’s than their par value!). Trading volume in the registration as a public shareholding company. market has also been deteriorating. Figure 1: Percentage Change in the Price Index -ASE (Weighted by Capitalization) 112.5% 92.… 75.0% 53.8% 36.3% 37.5% 29.8% 62.4% -11.6% -12.6% -5.6% -0.2% 0.0% -1.6% -3.7% -1.2% -2.3% -3.8% -37.5% -20.5% -17.0% -32.6% -75.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 There is no doubt that the reasons behind the Liquid stock markets allow investors to get fall in stock prices are various. However, their orders executed as quickly irrespective of what they are, this policy paper (immediacy), and as cheaply as possible. argues that one issue that must be dealt with is liquidity. Amman Stock Exchange: The Way Forward | SEPTEMBER 2017 4 The ASE suffers from illiquidity in terms of both 3. It is worth looking into licensing interested of its dimensions: companies to provide liquidity by acting as market-makers. As market-makers, will be First, investors cannot get their orders executed obliged (by law) to continuously offer their any moment they choose regardless of what the bid and ask prices, immediacy in trading will price is. be achieved. This recommendation need not be applied to all listed companies at once. Second, even when investors get their orders The market can start by selecting a list of executed, they usually do so at a high cost (bid- companies. Again, the international ask spread). evidence shows that such a move (change) increases liquidity (trading volume) and The implications of illiquidity are too serious to reduces liquidity cost (bid-ask spread). ignore: 4. Once the market improves in its liquidity First, stock price changes tend to be volatile dimension, short-selling can be introduced (risky) because they move between wide bid and to improve liquidity even further. Again, the ask prices. international evidence shows that short selling does reduce liquidity cost (bid-ask Second, the international evidence clearly shows spread) in liquid markets. that stock returns in illiquid markets tend to be low. 5. The government must seriously consider “activating” the secondary market for the Third, low stock returns discourage listed firms issued treasury bills and bonds and making to issue stocks on the primary market to finance them liquid. Naturally, this is a complex task their investments. Indeed, in illiquid markets, and needs some detailed analysis. Within the cost of capital is relatively high. this context, it is also in the interest of listed firms themselves to have a liquid corporate In this policy paper, the Jordan Strategy Forum bonds market. Such a market would provide analyzes the ASE in terms of its secondary them with an additional source of financing market liquidity. their capital investments. Based on the analysis which covers 11 years, and building on international best practices, experience and evidence, five policy recommendations are suggested to help move the Market forward. 1. Reduce the “minimum tick” from the currently existing multiples of one piastre to, say, half of one piastre. The international experience shows that the cost of liquidity becomes lower following such a change. 2. The fact that the market price of so many listed stocks are low (for many, price is even lower than one Dinar), any change in the price (multiples of one piastre) tends to be large. This is why it is worth encouraging firms to “reverse split” their stocks. Doing this would increase stock prices and hence reduce liquidity cost. Amman Stock Exchange: The Way Forward | SEPTEMBER 2017 5 For so long, economists, as well as others, have Based on the relationship between financial tried to understand what impacts economic development and growth, it is stated that “a growth and development. Relying on various large body of economic literature supports the theories, and using different methodologies, the premise that, in addition to many other economics literature attempts to explain, in important factors, the performance and long- particular, why some nations succeed in term economic growth and welfare of a country achieving strong and stable real growth, while are related to its degree of financial others fail. development” (World Economic Forum). As expected, the cumulative, and on-going Within the context of the economic importance research effort has placed particular emphasis of stock markets, the research community on a wide array of factors. These factors include, stresses the instrumental role of liquid for example, investment, human capital, foreign secondary markets. Liquid stock markets allow direct investment (FDI), political stability, investors to get their orders executed as quickly innovation and research and development, (immediacy), and as cheaply as possible. openness to trade, institutional framework, Liquidity refers to the ease with which buyers demographic trends, monetary and fiscal policy, and sellers of securities promptly transact with and many others. minimal impact on the price. Recently, there has been a growing interest in For all stock markets, this concept (liquidity) is how financial development (the establishment extremely important for two main reasons: and expansion of banks and stock exchanges) may affect economic growth. It is argued that The first reason, known by the level effect, is due financial systems can mobilize savings, allocate to Levine (1991). The fact that profitable capital economic resources, facilitate the trading, investment projects require long-term hedging, diversifying and pooling of risk, and commitments of funds, the presence