Market reform: The eighth gate of Damascus?

Interesting video (click for link) by FOX Business from a few days ago profiling the Damascus Stock Exchange, which was born following the Presidential issuance of Decree 55 (the Stock Exchange Act) establishing a market for securities trading, and which is approaching its first birthday while waiting to move to its new home (“the Eighth Gate”) in 2011. The government’s relatively newfound embrace of market-based principles is part of a pragmatic strategy to diversify and generate capital flows, analysts point out. Per Rami Bourgi, head of emerging markets for Société Générale Securities Services, “[Syria] realized it couldn’t rely on the wealth derived from its oil reserves and the government is reforming key institutions along the same lines as China. Oil sales are not ‘Saudi-like’ and they know privatization is a good way of raising investment levels for infrastructure spend.” Concurrent with ongoing market based reforms, Syrian President Bashar al-Assad has been openly courting a variety of international investors, going so far as to advise Turkish businessmen last month to “directly get in contact with him to report any issues they face when investing in Syria” and to assure them that such “difficulties will be resolved.” Presently, Turkey, Saudi Arabia and Kuwait are Syria’s top three sources of FDI, which in aggregate has risen from $152m USD in 2002 to over $2bn in 2008.

To maintain these flows, “reformist zeal” is rampant, say observers. In January, the country’s central bank announced two financial sector reforms that the bank hopes will “encourage large foreign banks to invest in the country and lend to a clutch of major new projects,” and that Adib Mayala, the bank’s governor, claims will “inject at least $2 billion into the financial system.” First, the cap on non-Syrian ownership of local banks was raised from 49% to 60%; second, the bank enacted “a mandatory requirement on private banks to raise their minimum capital from $30m USD to $200m for conventional banks and $300m for Islamic banks.” The importance of such changes cannot be underestimated, argued Raed Karawani, a Damascus-based attorney. “This will open the door for international banks like Citibank and HSBC to come to Syria. They didn’t want to be restricted to the 49% limit.”

Improved relations with the West, however, may prove to be the crucible to lasting change. Further U.S. or even newfound EU sanctions could nullify whatever reforms might exist. To that extent, the Obama administration’s nomination last month of an ambassador to Damascus was a necessary step towards the “thawing of relations.” What Syrian officials choose to do with this opportunity is another question.