Success has many a parent, failure is an orphan! This can never be truer than in the case of the Amman Stock Exchange where the market lost almost one third of its value since the beginning of the year. One significant contributor to this non-stellar performance is over-regulation.
The stock market price index (a weighted measure of stock prices) has fallen from 8530 points in January 2006 to 6217 points this month. That is stock prices have fallen by 27 per cent, which means that if you had invested JD100,000 of your savings at the beginning of the year, you now have JD73,000, and lost JD27,000, which is 18 times the per capita income. Thus, the accumulated savings of 620,000 households, whose heads had invested in the stock market, represent over three million Jordanians, or 60 per cent of the population which was impoverished by 27 per cent.
When the stock market was booming in 2004 and 2005, there were plenty of statements by officials boasting about the success of the market as if it were their own doing, a common phenomenon in the country that should at some time disappear. The statements were not true; in fact the market succeeded in spite of them. However, when the stock market started a free fall, the word in officialdom was mum. Instead, sporadic, muted defences started as everyone lamely attempted to shift the blame. What happened was a clear manifestation of policy, not market, failure.
Not only were the Central Bank of Jordan (CBJ) policies insensitive to the need of liquidity at the stock market, as the CBJ escalated borrowing and hiked the interest rate 16 times since 2004, but so were some of the regulations that were introduced by the Security Exchange Commission, which ultimately culminated in several demonstrations of protest, including one last week, outside the building of the commission. Both institutions seemed intent upon stifling the stock market, one by shoving it aside, the other by over-regulating it.
While the CBJ utilised a strict policy of matching US interest rates to maintain the dinar-dollar peg, it did not address the claims that it was diminishing the competitiveness of Jordanian manufactures by increasing investors' interest rate and weakening the stock market by making borrowing more expensive. In addition, as the US dollar exchange rate went up against the euro, and with it the Jordanian dinar, Jordanian exports of goods became even more expensive and, consequently, less competitive.
On the other hand, one possible simple and more correct formula was not to match the discount rate hike by the US point by point but to evaluate in a general policy framework that takes the interest of the economy as a whole, including the needs of the stock market. In other words, increase the discount rate in a weighted manner that relates to the size of US dollars in the foreign reserve basket, and takes into account the idiosyncrasies of the Jordanian economy while still avoiding the dollarisation of the economy. Internally, the upshot of the US interest rate matching policy of the US was to make it more difficult for cash-strapped investors in the stock market to borrow on the margin.
On the other hand, the Securities Exchange Commission (SEC) installed at least two policies in the last eight months that dealt unexpected blows to stock market investors. The first was imposing a new pricing methodology to the stock of the United Arab Investors Company (UAIC), which was later applied on all similar new issues. The story goes like this: UAIC announced in the last quarter of 2005 that it was planning to give two additional shares at the price of one dinar per share to every share held. The stock price rallied up to reach exactly JD16 per share before the date of the issue, as investors correctly expected that the total cost per share would be JD6 while the price per share, as was typical in other previous cases, would open at around JD10; thus each share would make a profit of JD4 to its owner, not a bad outcome. However, just before the event, the SEC announced that the price would be artificially set by the exchange at JD6. The stock suddenly and through an example of policy failure became a burden, not a bonanza. Investors had to borrow to buy the stock in order not to lose money instead of borrowing to make money. All of a sudden expectations of wealth evaporated.
The stock price took a dive to just over JD2.5 per share and never fully recovered as the savings of Jordanians were dissipated through a shift in policy.
Who is to compensate Jordanians who invested based on existing market regulations that changed all of a sudden? No one; majority of investors simply went into borrowing at ever growing interest rates.
Was such a policy necessary? Not at all! Paternalistic regulations are pass. One thought we had given them up with the introduction of economic reforms in the 1990s. Regulatory bodies do not know better than investors and they should not even pretend to be capable to mess with the market without their policy leading to havoc and misery.
A second, more recent, policy of the SEC was equally disastrous. The SEC passed a regulation several days ago, banning brokers from lending to investors. Brokers had allowed their customers to borrow in excess of their margin accounts and buy stocks and pay later. This was a common, prevalent practice that was neither condoned nor criminalised by the SEC. Suddenly, the new regulation banning the practice was issued and brokers had to comply. They asked their clients to pay their outstanding debt immediately; the clients, panicked by the new regulation, started to dump their stocks, causing an over supply of stocks that did not match the already stifled demand.
At a time when the economy is suffering from an unemployment rate of 15 per cent, a poverty rate of 20 per cent and an expected inflation rate of 12 per cent, stock prices plummeted and the accumulated savings of Jordanians dissipated yet again, destroying the wealth of Jordanians at the stock market due to overnight policies that ignored market dynamics with distributionary, disastrous consequences.
The SEC claimed its policy was aimed at protecting investors. This is a wrong approach; policies by the SEC should protect investment, not investors, because they are protected by Jordan's more than capable and modern legislative framework. Investors shy away from a market where policies change unilaterally and quickly.
A brilliant ex-prime minister once warned that as a rule, a perfect balance must be drawn between the stability of economic regulations and the need for modernising policy. We should heed this advice and stop the barrage of fragmented policies. They do not work; worse still, we won't be able to work.
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