Since Kazakhstan shrugged off its Soviet mantle it has undergone a formidable transition that commenced with adopting free market practices and the subsequent establishment of the new capital city of Astana. Moreover, it has been working toward economic goals conceived in its National Programs, the latest being the National Vision 2050. In his 2017 address to the nation, President Nazarbayev summarized Kazakhstan’s comprehensive economic modernization, pointing to overarching consequences for state processes, the private-public balance, and, not least of all, the financial markets.
The capital markets are a key benchmark of economic prowess. Kazakhstan’s had particularly auspicious beginnings, being conceived just a day after the nation launched its own currency, the tenge, on November 15, 1993. The decision to launch what is today’s Kazakhstan Stock Exchange (KASE) was a joint initiative of the National Bank of Kazakhstan and 23 local commercial banks, and the markets have rapidly gained traction since then. Today, KASE has 48 financial institution shareholders, the majority shareholder being the National Bank of Kazakhstan. As of January 1, 2017 KASE had 58 members, with 49 active in the stock component, 19 in derivatives, and 35 in the currency market.
In October of 2016, KASE announced a key rebranding program to the investor community that positioned the bourse as a more customer-centric and diversified entity. In a TBY interview, KASE Chairperson Alina Aldambergen explained that, “Our recently approved Development Strategy for 2016-2018 focuses mainly on attracting new issuers, expanding the investor base, and deepening the FX market by increasing the number of participants, besides local banks, (but also) on the improvement of risk management and clearing services.“ It is noteworthy that for FY2016 the energy and finance sectors dominated in terms of their share in the MCap of share and corporate bond trading. Energy claimed 68.9% of the former and 31.2% of the latter, while finance claimed 15.4% of the former and 48.6% of the latter. Meanwhile, the wider adoption of technology is seen as instrumental in fostering the information transparency and international reporting practices that will make the KASE more appealing, and hence competitive. The rebranding is geared at attracting greater market volume and boosting liquidity through which to finance local businesses. Among the goals of the Development Strategy are raising the number of listed companies to 172 within the period, and the listing of at least 170 corporate securities issues. And in terms of MCap, the objective is a print of KZT15.7 trillion, hence 33% of Kazakhstan’s targeted GDP.
Approaching Game Changer
While wider in scope than the capital markets per se, we would be remiss not to mention Kazakhstan’s ambitious financial sector project announced by the President back in 2015, the Astana International Financial Center (AIFC). The center, modeled on Dubai’s equivalent, is scheduled to take residence in Astana on January 1, 2018, just after the international trade fair Expo 2017 is held there for the first time ever in Central Asia. With its own financial court and arbitration mechanism, it will hugely advance financial sector transparency, and the goal is for the AIFC to rank among Asia’s top 10 financial centers, and among the world’s top 30 by 2020. It is also considered instrumental in advancing the sustainable economic diversity required for Kazakhstan to become a top-30 global economy by 2050.
Floating, not Listing
The vast project above will be floated on a raft of major privatizations, and KASE specifically is keen to reverse the trend where banks are the predominant source of funding for local businesses, notably SMEs. “Over recent years,“ Aldambergen explained, “the major source of funding for companies has been bank loans denominated in dollars, which given the devaluation led to significant losses.“ Indeed, in step with the continuing adoption of free market principles, the government envisages the state’s share in the economy ultimately declining to 15% of GDP. The government has revealed that work is being done to expand privatization to the vast Samruk-Kazyna, Baiterek, and KazAgro holdings, with only natural monopolies and the implementation of strategic national projects to remain state preserves. Encouragingly, in 2016 the KASE saw the IPO of Aktobe Metalware Plant, which successfully raised KZT800 million, being oversubscribed 3.7 times on demand of KZT2,975.3 million. As of January 1, 2017 the value of the stock had risen 26.7% to KZT14,165.7 per share.
In late 2016 a Chinese consortium comprising the Shanghai Stock Exchange, Shenzhen Stock Exchange, Chinese Futures Exchange, Pak-China Investment Company, and Habib Bank Limited won the bid for a 40% stake in the Pakistan Stock Exchange (PSX) for approximately USD85 million. Note here that the PSX was the world’s fifth-strongest performing bourse in 2016 on an annual gain of 43.05%. The strongest index was the Brazil IBOVESPA Index, up 63.36%, and the third was KASE, which had soared 59.95% YoY. This illustrates its potential to play a seminal role in regional finance, having already integrated with the Eurasian Economic Union and sounded out interest for future market integration. Thus far, KASE is set to sign an MoU with the Zagreb Stock Exchange on information exchange, while Aldambergen noted, too, that, “We have had very productive discussions with London Stock Exchange, Borsa Istanbul, Warsaw Stock Exchange, Nasdaq OMX Armenia, and Central Asian Stock Exchange.“
Once the National Bank had mitigated the seismic effects of devaluation in 2015 the KASE index resumed an upward trajectory. It was fueled by pent-up demand—individual accounts rose by 3,587 to 105,319 in 2016—and the fact that “most shares were trading well-below their book values.“ Accordingly, the benchmark KASE index skyrocketed 58% to 1,357.87 in 2016, marking a six-year high. Yet, the impact of devaluation meant a drop from the 2015 trading volume of USD430 billion, to USD250 billion for 11M2016. The KASE Index peaked historically at 1,895.04 in February 2011 and troughed at 760.95 in March 2015. Meanwhile, market research conducted by Trading Economics points to an index level of 1,320 by the end of 1Q17, and 1,280 by YE2017. The MCap of the equity market had climbed 15% YoY to USD42.8 billion as of January 1, 2017. In terms of profitability, for 9M2016 the KASE registered total assets of USD26.5 million, posting a slender net profit of USD0.5 million. Meanwhile, ROA and ROE were respectively at 1.8% and 2.4%. For FY2016 the total trading volume of the KASE registered at USD276.2 billion. Of this amount, foreign currency transactions accounted for USD14.9 billion and repo transactions for USD167.6 billion, with shares trading at just USD744 million. Elsewhere, the MCap of the corporate bond market registered at USD24.8 billion, and the volume of public sector debt in the government securities market came in at USD21.9 billion, while the traded volume of government paper stood at USD0.6 billion and USD1 billion in the primary and secondary markets, respectively. The repo transactions market saw trading volume soar for the year to USD167.5 billion (2015: USD104.2 billion), with all but USD1 billion of corporate securities accounted for by government securities. And finally, the FX market saw trading volume print at USD104.8 billion, one-third of the previous year’s performance.
Major developments are afoot that can but galvanize Kazakhstan’s internal dynamics, and, by extension, its international standing. The trick, and no mean one, remains to instill the idea among businesses that the IPO option is for them.