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As the Levant continues to face external challenges with the war in Syria ongoing, Mena Fund Manager looks at some of the challenges faced by local asset managers in Jordan, Lebanon and the Palestinian Territories
The Levant has faced a number of challenges in recent years. The influx of refugees from Syria have increased financial pressures on the economies of Lebanon and Jordan, while last year's Israel-Gaza conflict has led to ongoing difficulties for the Palestinian Territories of the West Bank and Gaza.
However, the onset of lower energy prices towards the end of last year were positive for the three energy importers.
According to the International Monetary Fund's 'World Economic Outlook', the Lebanon and Jordan economies grew by 2% and 3.1%, respectively during 2014 and are set to see higher rates of growth this year. The Palestinian Territories are expected to return to growth in 2015 after a double digit decline for Gaza last year.
All three countries saw stock markets grow during 2014, according to data from S&P Dow Jones Indices, albeit at low single digits. So far this year, the Levant region includes two of the best performing markets for the whole region, Jordan and Lebanon.
So what does 2015 hold for the three?
Lebanon
The largest of the three economies in the Levant, Lebanon has continued to grow despite the ongoing war in neighbouring Syria. The conflict has seen more than one million refugees pour into the country, which lies closest to Syria's capital Damascus, increasing pressure on the Lebanese economy. Skirmishes along the Lebanese border with Syria have also posed caused concern over a potential spillover.
The large influx refugees into the country, which has a population of just 4.5 million, is likely to pose a number of challenges for the economy, despite the benefits of lower oil prices to the oil-importing country. Growth is set to increase slightly to 2.5% this year and remain at the samelevel during 2015, according to the International Monetary Fund's Regional Economic Outlook.
There are challenges facing the Lebanese government, though. "Lebanon's economic performance has been weaker and more volatile than peers since the onset of the Syrian conflict in 2011," ratings agency Fitch Ratings noted in its latest update.
"Public finances are very weak," the agency added. "General government debt is the third highest among Fitch-rated sovereigns at an estimated 134% of GDP in 2014.
"High debt levels have also contributed to an exceptionally high interest bill, at nearly 40% of government revenues. Persistent budget deficits will contribute to a further increase in the public debt stock through the forecast period."
One area where the country has continued to show strength, however, is the banking sector. Foreign reserves have grown and deposit levels remain high.
"Despite increased political instability and economic weakness, the Lebanese banking sector continues to attract deposits of residents and non-residents - mainly Lebanese Diaspora - with total deposits up by 6.9% YoY in January 2015," a recent note by Deutsche Bank reported.
However, the bank's report also highlighted another issue: "Lebanese banks are strongly exposed to the government, which, vice versa, highly depends on the banks to finance its large deficits and debt."
Looking ahead there may be other challenges. The country's factious political scene poses problems for the economy as it has yet to appoint a president. Parliamentary elections scheduled for this year have been delayed until 2017, while the passing of legislation to help stimulate the economy and other market measures may yet be some time off.
Jordan
Also sharing a border with Syria, Jordan has found itself as the reluctant home of many refugees from its wartorn northern neighbour. Several hundred thousand refugees have crossed the border to seek safety.
The Jordanian economy is forecast to grow by 3.8% this year, while the S&P Jordan BMI index has grown by 6.2% during the first five months of 2015 - one of the strongest performers in the region.
Securing the economy has been one of the key priorities of Jordan's King Abdullah, who set out a 10-year plan last year to stimulate growth and foster greater investment from private sector.
The growth of the market has prompted some optimism for participants in the market. Wassim Jomaa, head of asset management at Capital Investments, a subsidiary of Jordan's Capital Bank, says. The country currently has a thriving asset management sectors with a number of players in the market.
"Jordan is a very friendly environment to be in, especially if you are already located in the Levant. You can find talented people to build an asset management team. The culture of asset management is present in Jordan."
He adds: "However, many people find that in order to diversify their source of [investment] income they have to get exposure beyond the Levant."
Jomaa says scalability is a challenge for the Jordanian market, adding: "You cannot scale up your business as if you were somewhere like London or Singapore.
There have been moves to help generate further growth in the economy. The enactment of last year's investment law saw the creation of the Investment Council and a number of other initiatives to help attract inflows into the Jordanian economy.
Shariah-compliant investing is an important theme, says Jomaa, but there remains a significant amount of groundwork before the products become a more mainstream offering for Jordanian investors.
He says conventional investment space has a number of outlets such as the local asset managers and international private banks, covering a number of asset classes.
Appetite for GCC exposure is high among Jordanian investors, says Jomaa, given the strong links to the rest of the region. There has also been interest in the crowdfunding market, he adds, but current legislation makes it more difficult for people to access the market.
"People are trying to adapt the level of uncertainty in surrounding region for the past five years since the Arab Spring erupted," he explains. "For people who are highly solvent they are willing to invest and understand what is happening.
"So far we haven't seen any worries that could lead to fund withdrawals," adds Jomaa. "We have seen some people being cautious, but no withdrawals."
Palestinian Territories
Last year's Israel-Gaza conflict had a significant impact on the latter's economy, which experienced a double-digit drop. While the performance of the West Bank economy was stronger, a period of rebuilding and investment is likely to be required before the Gaza economy returns to full strength. The combined GDP for the territories is expected to grow by just 0.9% in 2015 before rising to 4.2% in 2016.
Despite a period of forecast low growth this year, there are a number of interesting investment opportunities for risk aware managers.
The Palestine Exchange, based in the West Bank, currently counts 49 listed securities and a market cap of just over $3bn. The bourse announced recently that it had been informed by the FTSE Group that it could potentially gain inclusion in its frontier market index at the next review in September, with the potential to attract further passive inflows although the impact may be limited given the size of the market and the liquidity constraints.
The Palestine Exchange has also organised a number of meetings with stakeholders this year to discuss the establishment of new investment vehicles such as equity and real estate mutual funds. Participants highlighting the need for a more diversified investment landscape and the need for greater public education.
"Palestine is a small market but the beauty of it is that literally nobody knows about it," says Marwan Haddad, manager of the $56.5m Rasmala Palestine Equity Fund. "It has a very strong institutional base." His investors include those from the region, particularly from Jordanians familiar with the market, and from the international space. The Palestinian Territories offer a different but interesting market for investors, says Haddad, unlike others in the wider Mena region.
Haddad says the market is dominated by several big names including Palestine Telecommunications, Bank of Palestine and Palestine Development & Investment, but claims liquidity is not an issue for investors.
"This is a market that serves 4.5 million people who are very well-educated," the fund manager says. "It's a basic economy mostly services, telephone and banking almost account for around 60% of the market."
Haddad says growth in the year ahead is likely to be difficult to manage with high unemployment and poverty in the Gaza following last year's conflict, while the West Bank may also face challenges.
Overview
One of the biggest issues facing the markets remains stability. The war in Syria continues to impact on the economies of Lebanon and Syria, while Gaza attempts to rebuild following the conflict with Israel.
"Spillovers from the ongoing conflicts in Syria and Iraq are likely to continue to hang over the outlook for Lebanon and Jordan," notes London-based independent economics Consultancy Capital Economics.
"With no sign that either conflict is nearing an end, the headwinds facing Jordan and Lebanon look set to continue.
"Security concerns will weigh on key tourism sectors. Moreover, Jordan has large trade ties with Iraq, meaning its exports are likely to remain subdued."
Despite the separate challenges each faces there are causes for optimism. Jordanian managers seem hopeful that the proximity to GCC markets will stimulate demand for products from investors while Palestine's young, educated population and dynamic companies should deliver further growth in the years ahead.
© MENA Fund Manager 2015
