OPERATION "BOND"

The securities congress of CIS countries, which was recently held in Baku, showed that foreign investors have quite a strong interest in the Azerbaijani securities market. Many foreign delegates to the congress pointed out that this is explained mainly by the fact that this market has only just started developing, but it is growing at a great pace and a lot of money can be made here, considering the stable political and economic situation in the country.

In principle, a number of investment organizations are already working in this segment of the Azerbaijani economy and can give quite a realistic assessment of the advantages and risks available here. Incidentally, there are quite a few risks here, although they are mainly related to legal rather than the financial problems of local issuers.

In an interview with R+, the head of the Investment Banking Division of Latvia's Parex Bank, Martins Jaunarajs, and director Janis Dubrovskis, spoke about their experience in working with Azerbaijani securities.

- How do you evaluate the prospects of the Azerbaijani securities market?

- Martins Jaunarajs: I think the biggest advantage of your securities market is that a great deal of work has been carried out so far to create the necessary legal base to regulate the issue of securities by local issuers and the possibility of attracting foreign investors. Relatively high average rates are especially attractive to foreign investors, which is why we expect rapid development in the market of promissory notes in the next couple of years. Of course, this will bring about a decrease in the same rates and an increase in the volume of emission. In that case, some investors will lose interest in the market, but they will be replaced by others.

Janis Dubrovskis: This means that the market can be divided into domestic and foreign loans. We already know that both the state and major banks of Azerbaijan are planning to issue Eurobonds. Thus, major financial institutions will borrow loans on the foreign market, while relatively medium-sized and small banks will be credited in banks or use the mechanism of issuing bonds, but in smaller amounts and on the domestic market.

- We know that Azerbaijan's Muganbank is the first local bank to enter the foreign securities market and make its bonds available to investors in the Baltic states. We also know that the bank's underwriter is Parex Bank. How do you evaluate the first experience of the Azerbaijani bank?

- M.J.: There are only two important conditions for setting up such a business: an issuer who needs funds and an investor who understands the business of this issuerer and trusts that he will be able to use and recover this money. We have such investors in the Baltic states, and here we can also see several issuing companies. For example, last year we issued corporate bonds for the MKT company which exports cotton, and now I can say that we are conducting negotiations with some Azerbaijani banks to provide them with similar services, but since there are no specific agreements yet, it would not be correct to disclose their names. The operation with Muganbank is just the beginning. I think that the volume of deals will grow. The thing is that considering how many business sectors are developing in Azerbaijan today, the volume of assets of the local banking sector is small. For this reason, banks must become bigger and financially stronger in the future, and these first issues of bonds, which we are carrying out now, will seem very small in a few years' time. The securities market of Azerbaijan has great potential, and those who enter the market first make more profit, of course.

- J.D.: For my part, I should point out that the profitability and volume of the market also depends greatly on international interest in Azerbaijan, on how economic reforms continue here, how the financial sector and its legal regulation develop, and on how safe investors feel here. Now many of them hope that the government and parliament of Azerbaijan will take certain steps to make changes and additions to legislative acts which could help improve the investment climate, for example, by lowering the 10-per-cent tax on interest payments, which is not the case in other countries. All this will help achieve great success in the further development of the securities market in your country.

- What other problems would it be good to solve in order to improve the situation on the securities market?

- J.D.: I think the main problem of enterprises in Azerbaijan is the lack of sufficient transparency in their work. For example, if a company intends to access the foreign securities market and attract investors, it should know that it is required to submit a report on its financial activities, drawn up according to international standards of accounting procedures, a report by an international auditor, information about the composition of shareholders and so on. Moreover, in order to develop the market of corporate bonds, it is necessary to ensure close cooperation between the regulator of the issuer and the stock exchange in order to achieve a consensus on the mandatory disclosure of information in brochures on issues. All these aspects will be really effective when bonds are issued, i.e. investors will be ready to pay more money on relatively lower rates and for longer periods.

- M.J.: Indeed, there are certain risks for investors in securities in Azerbaijan. These risks have already been noted, but nevertheless, it is a good thing that there is a stable political and economic situation in the country. For example, we think it important that the National Bank of Azerbaijan regulates the rate of the local currency - the manat has quite a stable value, which makes it attractive for investors in promissory notes. The manat is under very strong pressure due to economic growth and macroeconomic dynamics in Azerbaijan.

- How do you assess Azerbaijan's chances in placing state Eurobonds?

- J.D.: The appearance of any new issuer, especially if the borrower is the state, on the market of promissory notes will allow investors to diversify their portfolios even more. Perhaps Azerbaijan will be the first issuer from the South Caucasus whose bonds will be accessible to a very wide circle of investors. For this reason, we think that chances of success are very good. On such financial markets, issues are usually seen as a standard for the bonds of all local borrowers (banks and major companies), which will probably have a positive, downward influence on interest rates.