ON THE BRINK OF REFORMS

In recent years, Azerbaijan's financial sector has increasingly emerged as one of the most rapidly growing and competitive segments of the country's economy. While the securities market has historically lagged behind, efforts are underway to bridge this gap.

The Baku Stock Exchange (BSE) has outlined a new development strategy for 2024-2026 with the goal of revitalizing Azerbaijan's capital market and attracting fresh investments. The BSE anticipates a surge of ₼2.8 billion in the volume of bonds from state and private entities over the next three years, with plans to draw in ₼2.945 billion from institutional and individual investors. Additionally, the market capitalization of shares from private companies is expected to reach ₼0.5 billion.

State Involvement

In formulating its development strategy, the BSE studied the experiences of around 20 countries in this field over the past decade or so. Farid Akhundov, Chairman of the Stock Exchange's Supervisory Board (SB), highlighted the significant role played by the state in these markets' advancement.

In Azerbaijan, the landscape differs notably. Among the most sought-after securities are the government bonds issued by the Ministry of Finance, which find their place among banks, as well as various state structures and agencies. Observing Japan's model, now emulated by other nations, state entities may allocate up to 50% of their investments in foreign instruments, provided they possess sufficient liquidity. The balance of 50% is directed towards the domestic market: evenly split with 25% in bonds and 25% in equities. In Azerbaijan, the involvement of state institutions in the capital market is curtailed by statutory constraints. As Akhundov remarked, their investment is confined solely to the Ministry of Finance's government bonds, with no entry to the securities of private enterprises. "The modus operandi of the sector's interaction with the government necessitates transformation. This is the rationale behind the capital market's annual yield being a mere ₼20-25 million, in stark contrast to the billions of manats accruing to banks. It is imperative for the association of professional stock market participants to broach issues with the government and the regulatory body to bolster support. At present, certain incentives exist – for instance, earnings from transactions involving investment securities are shielded from taxation; however, these measures are insufficient. To catalyse the stock market's growth, it is imperative to broaden the scope of such incentives," articulated the head of the Exchange's NA.

In the pursuit of advancing the government bond market, the Baku Stock Exchange (BSE) is set to proactively champion the issuance of government bonds by state-owned enterprises, offering them both advisory and informational backing. This initiative will encompass collaboration with state-owned entities in orchestrating and executing road shows — a preparatory phase for the issuing company when launching its securities — as well as pinpointing prospective investors.

Currently, a mere trio of state-owned enterprises — the State Oil Company of Azerbaijan (SOCAR), with two issuances amounting to $100 million apiece, AzerGold CJSC, with two issuances at $20 million each, and the Azerbaijan Caspian Shipping Company CJSC, with a single issuance of $100 million — are active in the capital market.

Trust is the key to success

In its effort to entice institutional investors, the BSE is devising a suite of strategies to enhance their cognizance of the Azerbaijani capital market's prospects and to streamline their entry into it. Foremost, the plan involves the establishment of a comprehensive database encompassing all institutional investors, which includes banks, insurance and asset management firms, pension and trust funds, as well as substantial business conglomerates. Targeted endeavours will be undertaken with each investor category.

To amplify their engagement in the stock market, pivotal incentives for banks to partake in the bond market will be delineated, and insurance companies will be educated on the merits of bond investment. Regarding other organizations, finance teams tasked with managing funds for companies boasting significant and favourable cash flows will receive support. To this end, instructional sessions on capitalizing on the bond market are slated. Concurrently, dialogues with other institutional investors are ongoing to discern the principal motivations for their bond market investments, with a robust exchange of information already in place. The BSE, in concert with banks and investment firms, is poised to launch initiatives aimed at elevating the financial literacy of the populace, students included.

Farid Akhundov perceives the principal objective as bolstering investor confidence in the market: "Previously, the market was accessible to fledgling companies, but the current imperative is to permit solely 'seasoned' entities that possess strategies for prospective growth, corporate governance, and a definitive profitability level. Absent stringent criteria, we will fail to cultivate a cadre of reputable investors."

In this vein, the BSE's strategy duly acknowledges the imperative to tackle the regulatory and procedural hurdles confronting private enterprises poised for substantial bond issuance. Dedicated research is slated to address this need.

Ruslan Khalilov, Chairman of the Board of the Baku Stock Exchange, underscored that the predominant challenge for companies has been the mandate for audit confirmation — furnished by either the auditor or the Chamber of Accounts — of the biennial forecast of the company's trajectory, as stipulated in the prospectus. "This stipulation imposes an undue financial strain on business entities, prompting many to forsake their aspirations. Consequently, our agenda includes the enhancement of the prospectus's substance, with anticipated easements in the BSE's internal regulations. In this regard, dialogues with the Central Bank are in progress," he elaborated.

An impetus for auspicious firms aspiring to enter the public domain is the IPO accelerator program (initial public offering of JSC shares). It is recognized that currently, there is no consolidated database of companies whose revenue trails that of major corporate entities, yet they exhibit robust financial health and harbour prospects for expansion. The exchange's mandate is to pinpoint such firms and devise a blueprint for their induction into the capital markets.

Akhundov identifies an additional quandary: the stock market is essentially in stasis. This predicament stems from the aftermath of voucher privatization, which resulted in the dispersion of numerous enterprises' shares among minority investors who abstain from stock exchange participation. Presently, the market boasts 1,200-1,300 active investors, contrasted with over 70,000 minority shareholders inducted via privatization vouchers. These shareholders are now in limbo. A number of these enterprises are bereft of assets on their balance sheets; the enterprise names and shareholders persist, yet the JSCs themselves are non-existent. "It would be prudent to transition such entities from JSC status to LLC, or alternatively, to introduce them to the stock market under certain conditions that align with the BSE's regulations. This matter necessitates a governmental resolution," Akhundov asserted, adding that the financial sector is traditionally at the vanguard of the IPO marketplace.

Accessibility for all

"Our aim is to democratise the capital market," asserts Akhundov. "We aspire for everyone, from homewives to heavyweight investors, to contribute to its evolution." He believes this approach will revitalise dormant funds within the financial system. Presently, in excess of ₼2 billion resides in the settlement accounts of major corporations within banks, yet these funds remain idle, neither aiding the economy nor yielding additional profits for the companies. An estimated ₼15 billion circulates in cash form.

Moreover, Akhundov points out that a minimum of 10-15 percent of businesses eschew bank loans, maintaining only operational accounts. A parallel can be drawn with Uzbekistan, where 35% of businesses abstain from credit instruments. The predominant deterrent is religious doctrine, as Shariah law proscribes loans for any intent. Nonetheless, the expansion of the equity market could engage these demographics, as shareholders collectively bear risks and returns, which aligns with Shariah tenets.

To this end, Akhundov emphasises the necessity of facilitating share issuance in the primary market and cultivating the secondary market, renowned for its superior liquidity.

Furthermore, the current trend among the youth is to invest in tech giants like Apple, Google, and Amazon via international brokerage platforms, despite the inherent risks. Access to these markets is achievable through various channels, including platforms, depositories, and custodian banks, albeit at a cost. "Should we manage to integrate this into our trading platform, it would be expedient and advantageous for all parties. We face no constraints in this regard and are actively pursuing this goal, aiming to make these instruments accessible in the local market," divulged the chief of the NS Stock Exchange.

The strategy also includes streamlining market access for individual investors. The BSE is intent on developing investment products that are both user-friendly and readily available to individuals. In this context, the exchange is placing its bets on banking mobile applications, which will enable investors to transact with securities effortlessly, purchasing various instruments with diverse yields at the tap of a button.

The BSE's novel strategy's execution is anticipated to yield multiple benefits for Azerbaijan's economy, notably in attracting fresh investments and enhancing corporate access to capital under more agreeable conditions.

The BSE's triennial development strategy is both bold and feasible. Its successful execution promises to render Azerbaijan an increasingly enticing market for investors and catalyse the nation's economic advancement.