Winter 2016

PALESTINE: A hostile neighbourhood

Palestine landscapeNow considered a frontier market, Palestine is gaining attention from investors abroad. But the challenges facing this embattled country are severe. Fiona Rintoul reports. This year, the practical business case for investing in Palestine received a considerable boost. In September, Palestine was promoted from unclassified to frontier market status by the index provider FTSE Russell.  “It’s a milestone in improving visibility and credibility,” says Amany Dahir, head of investor relations at Siraj Fund Management, a Ramallah-based fund manager founded in 2011 to manage investment funds in Palestine. “When you mention Palestine, conflict and volatility come to mind, but our market is quite stable.”  But not everyone is convinced of the business case for investing in Palestine, which remains a vulnerable country blighted by conflict. Could co-operation with its neighbours be a positive sign for investors? BOYCOTTS
The problem is that co-operation is a vexed issue in Palestine’s neighbourhood. Some international investors use their allocations to support the Palestinian cause, for instance the Boycott, Divestment, Sanctions (BDS) movement, which urges investors to divest from companies it believes are complicit in oppressing Palestinians. Thus, in 2011, Triodos Bank excluded Dexia from the Triodos sustainable investment universe because of its ongoing financing of Israeli settlements in the Palestinian territories. In 2014, PGGM, the largest Dutch pension fund, withdrew all its investments in Israel’s five largest banks because of their involvement in the West Bank.  In the past couple of years, the situation has been further politicised by the US and UK governments moving to boycott the boycotters. In 2015, Illinois became the first US state to ban its five state pension funds from investing in companies that boycott Israel.  Is it possible to search dispassionately for good investment opportunities in this environment, to be a practical business person? It may be, but, because of the practical results of politics, the search leads many investors to avoid Palestine entirely.  “We have looked at Palestine but have never invested there,” says Zin Bekkali, chief executive of Silk Invest, a frontier markets fund manager. “We were happy to see that Palestine has moved into the FTSE frontier index, but unfortunately it remains one of the most illiquid markets.” RECONSTRUCTION
Investing in Palestine is hard work and perhaps requires a certain commitment. However, alongside the FTSE Russell upgrade to frontier market status, recent positive economic trends have supported the market.  “Economic growth is driven by consumption that is financed by credit and increased employment of Palestinians in Israel, with unemployment declining from 17% at the end of 2014 to 15% by the end of the third quarter of 2015,” says Ali Taqi, head of equities at Rasmala Investment Bank. “Overall activity is supported by the commissioning of reconstruction in Gaza, with $3.5 billion pledged for Gaza to support reconstruction efforts.”  Rasmala runs a Palestine equity fund from its offices in Dubai. The fund invests in the Nablus-based Palestine Stock Exchange, set up in 1995. The exchange comprises 49 stocks, but more than 50% of the Rasmala fund is invested in just three companies, revealing a debilitating lack of depth on the exchange.  The Palestinian exchange may have been awarded frontier market status by FTSE, but none of its companies yet qualifies for a standalone FTSE index. That’s one reason why some investors prefer to take a different route into Palestine, for instance by buying Jordanian companies such as Arab Bank, which is active in the Palestinian economy but listed on the Amman Stock Exchange. BORDER CONTROL
The obvious brake on the local market is politics. Companies that operate in Palestine are inevitably hindered by the political situation, limiting the investment opportunities.  “Reaching a peace deal with Israel will help unlock the true potential of the Palestinian economy,” says Taqi. “Any delays or obstructions to the progress of peace negotiations, similar to what we have witnessed over the last five years, will continue to impede economic development in Palestine.”  At the same time, Palestine has a young, educated population. The investment opportunities are there – particularly among early-stage businesses – for those, such as Siraj Fund Management and Palestine Investment Fund, who know where to look. Siraj Fund Management sees opportunities in financial services, healthcare, industrials, agriculture and information and communications technology (ICT), as well as tourism, construction and engineering. Sometimes it’s a question of working with what you have. ICT is a particularly interesting area, says Dahir, of Siraj, because it is conducted virtually. “We don’t have control of our borders, but there are no borders when it comes to these services.” Also interesting is energy, particularly renewable energy such as solar. As well as potentially offering good returns, investments in this area help to create the more robust infrastructure that facilitates further economic development. “Palestine is still a virgin market,” says Dahir. “There is a strong dependency on Israel for electricity and other resources, such as water. Some 90% of exports go to Israel. We would like to see a change in terms of dependency.” BEACON
The road may seem long, but progress has been made. Dahir points to the planned Palestinian city of Rawabi on the West Bank, spearheaded by the Palestinian-American entrepreneur Bashar al-Masri, as a beacon of hope. But Siraj’s confidence in the revitalisation of the Palestinian economy is perhaps best illustrated by its decision to launch a second fund.  “We have soft commitments and are confident we’re going to raise the first initial call,” says Dahir.  Most of Siraj’s investors are locals or Palestinians from the diaspora, though it does have some foreign investors. A further upgrade to the Palestinian market, which Dahir believes is likely, could bring more foreign investors to Palestine, especially if combined with an improved political situation. The new Siraj fund might compete with another product, a Palestinian equity fund that Bank of Palestine chairman Hashim Shawa hopes to launch next year (see interview on pages 16-17). Some of the investors may well come from neighbouring Israel where there is a pool of business people interested in running projects in the Arab world. What drives them? Practical business sense, believes Naava Mashiah, who founded ME Links, a company that promotes business relations between Israel and its neighbours.  “They tend not to see the map through politics; they see it through economics,” she says. Some Israeli firms say they would welcome more economic co-operation with Palestine. “There is already significant energy/natural gas integration between Israel, Jordan and the Palestinian Authority, and hopefully soon with Egypt,” says Steve Schoenfeld, founder of BlueStar Indexes, an exchange-traded fund (ETF) company. “Major natural gas finds in the eastern Mediterranean will drive deeper integration.  “There is strong economic logic for both Greece and Cyprus, and potentially even Turkey, to join in this energy collaboration too. Assuming that the political dynamics improve somewhat, this co-operation in energy could extend to other fields, such as infrastructure, water technology, agricultural development and more.” This is an edited version of an article that will appear in Funds Europe ©2016 funds global mena

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