Speculative Prices and Debt Challenges: Analyzing Somaliland’s Economic Landscape

Somaliland’s economy is dependent on Public Trust.

Most of the businessmen lend themselves hard money or its equivalent which is always linked to the services they are dealing with or their products. Such as, Medical Equipment, Construction Equipment, Furniture, ETC.

There are also businesses that form a union or merger, and form a single company that provides services together, and the two parties who enter into agreements usually agree that the value of the company being merged is not the other that is joining its immovable and non-removable property. In order to evaluate it, it is sent to an evaluation broker, and then the evaluation is taken together with the amount of the company’s share of the company it has joined (Company Share).

So, as I said earlier, the companies deal with two methods, one based on full Purchase and one based on debt, the two methods are mostly in the market based on the debt-based method, that is where we put the power of our writing, the importance of our writing is on. This issue has resulted in the Free Market of Somaliland leading to economic uncertainty which can lead to severe economic damage to the country’s economy.

In order to bring you closer to understanding, we are presenting here two ways of business that traders exchange things with each other, which we follow with live examples that happen every day in our market. We will also reveal the hidden dangers that cannot be hidden from the eyes.

 FIRST SCENARIO:-

In business based on this method, we will take an example of two companies, each of which does its own service, but it is not necessary for them to buy or borrow from each other, and it is based on their debt (i.e. when they pay the first debt, the second debt is given to them) – if the companies that work in construction, let’s take one of them as the first example, and let’s add those who sell construction materials, because they do business with each other. A construction company always buys building materials to build, and they often borrow from hardware stores for what they need. In the event that the construction company goes bankrupt or falls into a bad market, it always makes sure that the property or the debt owed is paid in shares or land.

The land is usually sold by brokers who do not have much knowledge of the effect it can have on the sale in their hands, and the government has no influence on the sale. Therefore, there is a lot of speculation in the land to be sold. On the other hand, the warehouse worker who buys the goods he sells with hard money always wants hard money to travel with.

A bankrupt or insolvent debtor will show that if he owes only $200,000 in two blocks of land in the city, he will only pay that amount if he has no balance. So, the main issue and tension is where the land that was transferred to the building materials dealer gets news one day that the land is not being sold for what it was assessed for, or something close to it. He is looking for someone to buy the land because he lacked hard money. Finally, he may find out the truth and the market will correct itself (Self Correction: Market). This property was missing firstly from the businessman, and secondly it was missing from the entire country’s economy, which is the danger that we are warning about happening.

SECOND SCENARIO: –

Companies that do business in the country trust each other and unite. In the second example, we take two companies that have united to sell only one service. Look at this: when the union takes place, the company that joins the other company is valued, as well as brokers are sent to evaluate the company’s assets. to make it $1,000,000 which is double according to the actual assessment of $600,000. The speculative price that is made, will affect the overall share of the company (Overall Share) as well as the correct price that the share is based on (Share Value).

At this point, it happens that the company’s shareholders have agreed on a false price that does not exist. As a result, the company’s share of its own shareholders will go against the market and the market will tell the truth, and this will result in the profit that the company brings when the two companies merge.

That will affect the country’s economy.

The analysis illustrates significant concerns in the economic landscape of Somaliland, particularly with regard to debt-based business practices and the implications of company mergers. Here’s a breakdown of the key points:

Key Issues Identified

1. Debt-Based Business Practices:
   • Businesses, especially in construction, often operate on a debt basis where services are exchanged for future payments. This creates a precarious financial situation, especially if one party defaults.
   • When a company goes bankrupt, they may settle debts with assets (like land) rather than cash, leading to complications in asset valuation.
2. Valuation Challenges:
   • Independent brokers evaluate the assets, but this can lead to overvaluation due to lack of market information or expertise. This dynamic can lead to speculative pricing in the land and property market.
   • A mismatch between the assessed value and actual market value can cause significant economic repercussions when bankruptcies occur or assets are liquidated.
3. Merger Valuations:
   • In situations where companies merge, inflated asset valuations can occur. When a company is valued significantly higher than its true worth, it creates a risk for shareholders and misaligns market expectations.
   • This could lead to stock price volatility and impact overall investor confidence, thereby affecting the country’s economic stability.

Potential Consequences

• Economic Uncertainty: The reliance on debt and speculative asset valuation contributes to economic instability, making it difficult for businesses to plan or invest for the future.
• Market Corrections: If overvalued assets become apparent, it can lead to sharp corrections in the market, resulting in losses for investors and further economic turmoil.
• Lack of Regulation: The absence of stringent regulations or oversight can exacerbate these issues, leading to a volatile economic environment where businesses operate with high risk.

Recommendations

To mitigate these concerns, a few strategies could be employed:

1. Enhanced Valuation Standards: Implementing stricter guidelines for property and asset valuation can help ensure more accurate pricing and reduce speculation.
2. Financial Education: Providing education to business owners and investors about sound financial practices may reduce reliance on debt and encourage more sustainable growth strategies.
3. Regulatory Frameworks: Establishing firm regulations regarding mergers and acquisitions can prevent inflated valuations and ensure transparency, thus maintaining market integrity.
4. Encouraging Diversification: Incentivizing businesses to diversify their operations and reduce reliance on debt could create a more resilient economic environment.

Mohamed Adam Ruush

Senior Banker and Corporate Law.