CAPITAL GROWTH

More recently, the stock market was considered the "weakest link" of Azerbaijan's financial sector. But in recent years, this area has clearly seen positive trends of development. Moreover, according to the head of the State Committee for Securities (SCS), Rufat Aslanli, next year we expected a double-digit growth in the industry, and this year, we have seen an increase of 34 per cent - the market of shares alone increased by 3.3 times.

Basis for growth

As you know, against the background of developments on the global financial market in recent years, there are serious debates about the role of capital markets in stabilizing the economy, which relate to the identification of new challenges for the securities sphere within the framework of the ongoing and future fundamental changes.

Due to the country's integration into the world economic processes, Azerbaijan cannot stay away from new challenges, of course. According to the acting manager of the World Bank in Azerbaijan, Rufiz Ciraqzada, the development of capital markets is also important in terms of expanding the range of financial services. "The financial system of Azerbaijan makes a great contribution to the economic development of the country. However, financial services in Azerbaijan are provided mainly through banks," Ciraqzada said.

The increase in capital markets, in turn, will affect the growth of the non-oil sector of the economy. "The more innovative they are and the more new products they make, the more alternatives for investors there will be," Ciraqzada said at the conference to mark the 15th anniversary of the establishment of the National Depository Centre recently held in Baku.

Meanwhile, next year will witness serious capitalization in some sectors of the economy, which will be implemented through the stock market. In addition, work is already under way to fund a number of projects with the debt instruments on the capital markets. These preliminary data allow us to expect a double-digit growth on the market in 2013. "The trends of previous years show that the growth of the market is much higher than the rate of the development of the country's GDP," R. Aslanli said.

Here are some quick stats: the total turnover of transactions on all instruments at the Baku Stock Exchange (BSE) in January-September 2012 increased compared to the same period last year by 38.83 per cent, which was achieved through increasing the market for government securities by 39.86 per cent.

Obviously, today there is a growing interest in banking or trade in debt securities in the country, which we cannot say of the stock market. According to the head of the SCS, such a situation is due to the fact that bank deposits are more secure and these deposits are insured by the Deposit Insurance System. In most cases, the pre-declared yield of bonds and debt securities is secured. Because of the relative risk, their yield is higher than that of bank deposits, which explains the interest in them, while stock returns are not guaranteed and depend on the activity of enterprises.

In addition, the unpopularity of shares compared to the banking services is due to the fact that transactions on the capital market compared with banking services are not that common. "These are tools with a higher risk, which are offered for better prepared, professional circles. Additionally, companies for financing on the capital markets should meet certain high standards. Companies facing such demands resort to capital market instruments only for financing very large projects," Aslanli said.

However, in his opinion, the economic processes in Azerbaijan and reforms on the capital markets will ensure stock market activity in the country in the medium term. "The country's economy is growing, and in parallel, local companies are growing too. Today, there are dozens of companies with billions in assets in the country. These economic processes and the reforms being conducted on the capital markets today will ensure stock market activity in Azerbaijan in the medium term," he said.

New law and new benefits

With regard to institutional and qualitative changes on the market, next year the SCS intends to focus on the adoption of a new law "On the securities market". This will open new horizons for major changes in the functional and operational direction of the capital markets.

"The bill has already been submitted for discussion to appropriate government agencies. This project will bring about a few indigenous innovations. The very notion of securities is rather expanded. Securities are shown in the bill as a contract reflecting economic relations. This defines more extensive rights and obligations for the issuer of securities and for investors," said the head of the state committee.

The bill proposes completely new market architecture of the trading process on the securities market and post-trade settlements.

"Major innovations are planned regarding the status and functions of professional participants of the securities market. Today there is a regulatory framework for the activities of brokers, dealers, companies and asset managers. The bill also provides for an institution of investment companies that will be divided into categories based on transactions and procedures depending on risk. Various capital and prudential requirements will be identified for them," Aslanli said.

In addition, the clarification and specification of taxation processes on the securities market will also serve to stimulate the market. "The collaboration between the SCS and the Tax Ministry is aimed more at ensuring that the procedures of taxation in this sector are more accurate and straightforward than tax benefits for the market. We believe that these clarifications and explanations, which will be made to the Tax Code, will give impetus to the development of the securities market in the country," Aslanli said.

The fact is that in 2010, the tax break expired, and as a result, at 10-per-cent tax will be imposed on the income of private and legal persons from securities transactions from now on. Earlier, in order to develop the market, it was planned to provide listed companies with tax benefits on investment securities. In addition, the parliamentary committee on economic policy has often made a proposal to exempt income from securities transactions from taxes.

Thus, we can expect that the next year will see a significant upsurge on the securities market, which will undoubtedly "stir" the entire financial sector.