ATTEMPT NUMBER...

The ongoing global coronavirus pandemic has also stormed the international capital market, washing away many well-established companies, while others barely stay on feet waiting for  better terms and refusing to enter any new deals. The global stock market suffers, respectively. Although the situation has begun to improve slightly with the start of vaccination, the existing uncertainties and chaos still put pressure on investors, intermediaries, and industries waiting for additional financial injections.

Surprisingly, the opposite is taking place in Azerbaijan. The liberation of the occupied lands has been such a powerful message to all investors that it has likely woken up the domestic securities market, which has been in deep hibernation for many years.

Regardless of pandemic

Despite all the difficulties, Azerbaijani companies, even in the critical year of 2020, continued their presence in the ‘big money’ market and even experiment with new tools to raise funds.

Thus, AzerGold CJSC made its debut placement of bonds for $20 million and used the proceeds to increase the resources of its deposits Chovdar (Dashkesan), Kohnamadan (Balaken), and Garadagh (Shamkir-Gadabay), to speed up the ground works and to fund field research on these deposits.

SOCAR Polymer also issued bonds for $200 million and the raised funds were used to re-finance part of the loan from Gazprombank JSC. This issue has become a special, significant event for the Azerbaijani capital market amid the temporary decline in business activity for well-known reasons.

The positive trend continued in 2021: SOCAR has already emitted two instalments of bonds in the amount of $100 million each.

Obviously, the pandemic increased the government spending and decreased revenues and put pressure on government funding. Therefore, we will perhaps see other large state-run enterprises among the bond issuers soon.

The number of new players from the private sector increases in the capital market. For example, one of largest retail seller of food and non-food products, Azerbaycan Supermarket LLC, has already issued ₼10 million in bods, with a plan to increase this amount to ₼40 million.

There are plenty of investors willing to buy securities of these companies. The volume of applications (demand) even exceeds the supplied volume of bonds several times. As a result, at the beginning of 2021, investments in the capital market increased significantly.

This trend will continue in the future. Chairman of the Central Bank of Azerbaijan (CBA), Elman Rustamov, recently announced the growing interest of large Azerbaijani private companies in the securities market. "Rehabilitation measures ongoing in large state-run companies due to the reforms by Azerbaijan Investment Holding, as well as the introduction of corporate governance standards will allow these companies to access the capital market to raise funds without waiting for money from the state budget," Mr. Rustamov said.

CBA plans to improve legislation on the capital markets, as it requires serious impprovement. For example, today the banking sector can join the capital market only through investment companies, which leads to bureaucracy and increases costs. "Our objective is to allow banks to become direct participants in the capital market," Mr. Rustamov said.

CBA has also developed a project for the development of capital markets. The key strategic goals of the project will be focused on the creation and improvement of an innovative regulatory framework, development of a modern market infrastructure, and market support. CBA also identified tasks for each of these goals, such as improving the existing legislation on the securities and derivative markets and bringing it in line with international standards, establishing relations with foreign depositories, creating a modern operating system, etc.

Access to the Turkish market

One of the strategic goals of the capital market development plan in Azerbaijan is to establish relations with foreign depositories. It is not surprising that the Turkish market will be the first one to trade Azerbaijani securities. Close economic relations between Azerbaijan and Turkey, mutual large investments, established business in both markets, trade turnover, and other factors make the choice obvious and logical.

In April, CBA and the Capital Markets Council of Turkey signed a memorandum of understanding. Like all such agreements, the purpose of the document is to form the necessary framework for the cooperation in capital markets given the requirements of the national legislation in both countries, to exchange experience, and to support researches in both countries.

It did not take long before the implementation started. Azerbaijan and Turkey have already reached an agreement to integrate their operating systems. As a result, securities listed on the Istanbul Stock Exchange (Borsa İstanbul) will be admitted for trading at the Baku Stock Exchange (BSE), while the Azerbaijani securities will start trading on the Turkish stock market.

According to the expert economist Jafar Ibrahimli, integration of the stock markets of the two countries has been discussed long ago. “Cooperation with Turkey started back in 2008-2009, when the capital market emerged in Azerbaijan. Members of the Turkish Stock Exchange, investment companies are shareholders of the Baku Stock Exchange. This time we discuss the issues of mutual trade and storage (depositing) of both the public and private securities in both countries. Azerbaijani investment companies have bought and sold the shares of Turkish companies since 2008-2009. Today our investment companies can operate on the Istanbul Stock Exchange; any investor who wants to buy securities in Turkey can do this through local investment companies," Mr. Ibrahimli said.

He added that Turkish investors have always shown interest in the state securities of Azerbaijan. “Turkish investment companies have been investing in Azerbaijani state securities for some time. But they did it on the Azerbaijani market. Now it will be possible to do this on the Turkish market,” Mr. Ibrahimli said.

In general, he believes that trading of Azerbaijani securities on the Turkish market will attract more liquid funds to Azerbaijan’s capital market.

Another expert, deputy director of one of the Azerbaijani investment companies, Nariman Yagubov, believes that the integration of securities of the two countries is possible through cross-listing and depositary receipt mechanisms. “Internationally, there are cross-listing or depositary receipt mechanisms. In the first case, the company's shares must be listed in Turkey after listing in Azerbaijan. Cross-listing usually applies to shares because 90% of bonds is mostly traded outside the stock exchange. As for the depositary receipt, the investment company buys shares in Turkey, then receives a receipt and makes a listing in Azerbaijan. The same mechanism can be applied in Turkey as well. This is an international mechanism and it can now be applies in both countries,” Mr. Yagubov said.

This means that the main issue here is the integration of depositories, not the stock exchanges. It is important that the securities stored in Azerbaijan are recognised in Turkey, and vice versa. “They should know our investors, and we should know theirs. Otherwise, a Turkish national will have to come to register with the depository here,” the expert said, noting that the sale of bonds in Turkey is unpopular. Mainly the shares are traded.

Disadvantages and benefits

It is well known that the development of deep and efficient local capital markets has a number of benefits. Many countries suffer from huge funding gaps, especially to develop sustainable infrastructure. A well-functioning local capital market can help consolidate and distribute long-term local currency funding in more sustainable ways and with less macroeconomic risks, thereby contributing to a country's economic growth.

G20 admits that a well-developed local currency bond market protects against global capital flows and reduces dependence on foreign currency borrowing exposed to foreign exchange risks.

In this context, a study by the Asian Development Bank (ADB) conducted as part of preparations to implement the Support for the Development and Reforms of the Capital Market in Developing Asian Countries (Azerbaijan, Mongolia, and Uzbekistan) project provides some interesting details.

Authors expect that the situation in a few segments of the banking sector, including asset quality and bank recapitalisation, will worsen under the existing economic circumstances. Therefore, "government bonds can help combat cyclic government spending, while corporate bonds can support the real economy by complementing the banking sector with the necessary liquid funds," ADB experts believe.

At the same time, despite potential advantages, capital markets in many countries of the region are still in their infancy, inefficient or illiquid. So, even before the pandemic (2019), the share of government securities in Azerbaijan’s GDP was only 2.3%. “The absence of an active market for government bonds or even a program that would ensure the emission of bonds, securities with a short maturity and limited trade (no secondary market) prevents the establishment of pricing benchmark necessary for the development of markets for corporate bonds and other financial tools,” ADB stated.

The bank also underlined that effective market infrastructure was also essential to ensure smooth and uninterrupted market operations, including the well-organised operation of the depository clearing and dealer systems, assessment systems, and registration. “Without an effective framework, emission of securities becomes too costly and unsustainable for the capital market supply to develop,” ADB analysts note indicating that governments, financial institutions, and private companies use local currency bond markets to raise capital to a very limited extent.

As part of the ADB project to be completed by the end of 2023, technical studies will be conducted to determine the progress of capital market development compared with other countries and the corresponding roadmaps will be developed and approved. Also, to eliminate the identified gaps, there will be plans for strategic development of the market and the necessary policy recommendations to build the capacity of the capital market, amend the regulatory framework, create an effective market infrastructure, and the market mechanisms of supply and demand.

Thus, the securities market of Azerbaijan will definitely reach a new level of development if the specified action plan is implemented accordingly. We hope this time everything will work as planned and be effective. After all, this is not the first attempt to revive this sector, which is important for the market economy.