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Central & eastern EuropeSeptember 3 2006

Capital markets await lift-off

So far the fortunes of the Baku Stock Exchange have been muted, but legal and systems changes are afoot.
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Azerbaijan’s stock exchange has taken the first steps to establishing itself as a capital market for the region. In due course, it should also become a key engine in the modernisation of Azerbaijan’s economy. The Baku Stock Exchange (BSE) has a 30-strong group of dedicated brokers and banks trading in government and corporate bonds and some equities.

Expectations for the exchange are high but performance has so far been disappointing. Finance minister Samir Sharifov says: “The stock exchange is not developed yet. You need big private companies to be floated in the stock exchange to get a lot of interest. We are keen to have a well-functioning stock exchange. There is sufficient progress but it is not at the level that pleases us.”

The BSE has a licence to provide holders of government securities with depositary services. A clearing account at the National Bank of Azerbaijan enables traders to register mutual obligations during trading sessions.

The exchange turnover has expanded in line with the growth of the economy. So from a base point in 2000 (when the exchange was founded) of 35m manat ($38m), turnover on the exchange has risen to a high of 517m manat in 2005.

State input

Government treasury bills account for most trading on the exchange. Some 551m manat had been issued on the exchange by 2006. They yield between 5% and 7%. The exchange has traded notes since 2004 and notes worth 284m manat have been placed since 2004, yielding between 5% and 6%. Repo operations between 2002 and 2005 have equalled 129.5m manat.

Corporate bonds remain a minor feature of the exchange, with just 23m manat traded between 2004 and 2006. Stocks are also poorly represented, accounting for just 99m manat between 2001 and 2006. Securities in state-owned companies dominate on the exchange. Between January and April 2006, 222m manat-worth of state-sector securities were traded, against 23m manat for the corporate sector.

Anar Akhundov, the exchange’s president, says the Baku exchange “plans to improve the clearing and depositary systems, revise its listing rules and strengthen its information support”. Specific plans include the introduction of a market-making system and inter-bank repo operations. It also plans to reduce operating and transactional costs. Training and marketing are also to be enhanced.

A legal change planned by the government will require banks to separate themselves from wholly owned entities trading on the Baku exchange.

Bullish sentiments about the prospects for the Baku exchange are expressed by Xeyal Abdinov, a director at Standard Capital (a subsidiary of Bank Standard).

“The exchange is growing steadily. The banking sector is the main player in the stock exchange and it is becoming more active. Our market is mainly involved with bond issues. That is the way it goes in an emerging market. Once the entire market grows, then equities will take off.” He says that Bank Standard, its parent, has recently issued a 6m manat bond for which buyers are being sought. This follows an earlier bond for 2m manat.

Overseas interest

Foreign investors from London and Moscow are understood to be significant buyers of both these bonds. The appreciation of the manat-dollar rate has led some issuers to offer foreign institutions settlement in dollars as insurance against foreign exchange risk.

Mr Abdinov says that corporations have started to regard the market as a place to raise money, and he cites recent bond issues from firms involved in construction and electrical products. “The equity market is in existence; it is working but not very active. People prefer to invest in treasury stocks and hold them rather than trade them. But some bonds are actively trading and issues are coming regularly.”

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Read more about:  Central & Eastern Europe , Azerbaijan