Syrian crackdown on protest seen scaring investors

by Reuters
Wednesday, 23 March 2011 17:03 GMT

* Foreign companies reluctant to commit capital-businessman

* Ample foreign currency reserves at central bank

By Khaled Yacoub Oweis

DAMASCUS, March 23 (Reuters) - The Syrian pound has fallen 4 percent and Damascus stock prices have tumbled since protests against Baathist rule erupted last week, threatening efforts to attract foreign investment to improve Syria's infrastructure.

The government had hoped to use the bourse to raise capital as it opens sectors such as electricity generation and transport to foreign investors, ending decades of state control.

But a violent crackdown on nearly a week of protests in Deraa and other southern towns, in which security forces have killed 10 people, has been a severe setback for the drive to attract badly needed foreign investment.

On Wednesday alone, security forces killed six people in an attack on a mosque in Deraa, site of unprecedented protests against President Bashar al-Assad's Baathist rule and demands for an end to corruption.

A Syrian businessman who has met Western companies to discuss forming joint ventures to bid for government projects said the projects could well be viable, but the rising political risk had prevented the talks from moving forward.

"There is reluctance to put big money into Syria now," he said, referring to a billion dollar metro line project and the planned expansion of a highway to Iraq.

Foreign direct investment fell to ${esc.dollar}1.4 billion in 2009 from ${esc.dollar}2.4 billion in 2008, according to the World Bank --- a fraction of the ${esc.dollar}85 billion the government says it needs to overhaul the transport system, power, health and communication network.

"Officials are talking about technicalities of projects as if political discontent does not exist," another businessman said. "They have not figured out that an open political system and rule of law are powerful investment magnets."

On the 20-company Damascus Stock Exchange, which opened two years ago, every stock that has traded since the protests erupted in Deraa on Friday fell by the 3 percent limit. The main market index has fallen 14 percent from its Jan. 26 2011 peak.

Even before the latest protests, foreigners were deterred from buying Syrian shares by extensive security checks, and by the U.S. sanctions imposed on Syria in 2004 for its support for militant groups, a bourse official said.

"The risk of holding the Syrian pound has gone up. There is demand for foreign currency and people are reluctant to part with their dollars," said a currency dealer in Damascus.

The Syrian pound, which is not fully convertible -- a legacy of Soviet-style economic policies -- was trading at 48.75 to the dollar at exchange dealers on Wednesday, though the official rate remained stable at 47 to the dollar.

Syria's economy underwent heavy nationalisation after the Baath Party took power in 1963. Assad, who succeeded his late father Hafez al-Assad in 2000, kept the authoritarian system intact, including the imposition of emergency laws, but lifted some bans on trading and private enterprise.

Privately held banks were allowed to operate in Syria eight years ago, and there are now 14 -- all subsidiaries of Arab banks -- but the sector is still far smaller than that of laissez faire Lebanon next door.

The central bank last intervened heavily in the market in 2005, when the assassination of Lebanese statesman Rafik al-Hariri in Beirut raised international pressure on Syria and pushed the pound down to 59 to the dollar from 46, before the central bank pumped foreign currency into the market.

There was no immediate comment from the monetary authorities on the falling exchange rate, but the central bank has repeatedly said that Syria's foreign currency position is strong, with billions of dollars in liquid reserves. (Editing by Tim Pearce)

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