THERE & BACK

Azerbaijan 2012 | FINANCE | REVIEW: CAPITAL MARKETS

With volumes and transactions sizes on the up and up, the BSE is looking to develop itself as a key part of the national economic diversification strategy.

Azerbaijan's youthful capital markets had a strong 2011, with volumes and turnover bouncing back toward the highs set in the pre-global financial crisis environment back in 2008. Although 2009 and 2010 saw volumes decline on the Baku Stock Exchange (BSE), as the Central Bank of Azerbaijan (CBAR) looked to cool flows and investors were still spooked by the international outlook, 2011 has seen a return of the role of the markets, with both the public and private bond issuers returning en masse to the capital markets. A combination of renewed non-oil sector activity and an active anti-inflation monetary policy saw both the private and public sector look to the nascent capital markets for support.

REARVIEW MIRROR

The BSE emerged in July 2000, after the market regulator, the State Committee for Securities, issued it with an exchange license at roughly the same time as the National Depository Center was reactivated. The first trades in government bonds occurred in September of the same year, with repos being added in November 2001. Until 2004, the BSE mostly acted as a vehicle for trading in Ministry of Finance short-term bonds. At the start of 2004, the BSE began to evolve, accepting the first transactions in corporate bonds, with CBAR also listing notes in September of the same year. Trading activity responded, with annual volumes shooting up from AZN94 million over 2004 to AZN518 million just a year later. By 2008, the BSE hit its high-water mark, with trading volumes of AZN9.52 billion recorded.

As the global financial crisis hit, liquidity dried up, with foreign investors shifting their funds elsewhere. Annual trading volumes slumped to AZN3.32 billion in 2009, and continued the slide south in 2010 to AZN2.22 billion. Before the onset of the economic crisis, some 54% of the bond market was in the hands of foreign investors, who looked favorably on the keen spreads offered by short- and medium-term Azerbaijani state debt. This figure fell to 40% in 2008, and by 2009 foreign investor activity in the market had all but subsided.

The government increasingly began to look to the capital markets as an additional means of support for the economy over the global crisis. In March 2009 the first placement of medium-term government bonds was offered to the market, while in June the Azerbaijan Mortgage Fund began to make its presence felt in terms of placements. By broadening the number of instruments available for investors on the market, the government and CBAR have sought to develop the capital markets as an alternative investment tool for the public, as well as being an increasingly useful means to conduct monetary policy. In terms of foreign investment, BSE Chairman Emin Aliyev was reported by www.trend.az in February 2012 as saying that “the flow of foreign investment will also begin to the stock market of Azerbaijan in the near future," indicating the possibility of stronger liquidity flows going ahead.

FIGHT BACK

With the doldrums of 2010 over, investors looked on 2011 with significantly more hope. Turnover on the BSE was nearly four times higher in year-on-year terms, at AZN8.43 billion for 2011 as compared to the AZN2.23 billion seen over 2010. Transaction numbers also rose some 23% over the same figure for 2010, indicating heightened activity in the market. The volume of transactions on the corporate securities market increased some 2.7 times to AZN2.14 billion, and this was reflected in an increase in the number of operations by 13%, showing that volume size per operation was substantially up on the 2010 figures. Some 52% of transactions were carried out on the corporate bonds side, while the securities market soaked up the other 48%. The corporate debt market has begun to look increasingly tempting for Azerbaijani companies, with primary market transactions up four times to AZN584.7 million over 2011. As Aliyev described the situation to TBY, “The Azerbaijani business community is becoming more and more aware of the capital markets." He sees the Azerbaijan's capital markets as being “on the threshold" of a new period of favorable growth.

Another noticeable feature of the bond market in 2011 was the strong growth in corporate bonds denominated in foreign currencies. Although AZN1.09 million was placed in euro-denominated instruments in 2010, the US dollar dominated over 2011, and saw some AZN410.32 million in bonds placed, forming some 36% of the total corporate bond market. The right to convert local currency issues into foreign currency was also introduced to the market in 2011.

On the government securities side of the trading sheet, volumes grew some 4.4 fold to AZN6.72 billion over 2011, with the number of transactions growing a respectable 1.6 times, confirming the trend of increasing transaction sizes for the year when compared to 2010. Although the Ministry of Finance was the primary issuer at the dawn of the BSE back in 2004, it only accounted for 4% of volumes in 2011. CBAR notes accounted for another 10% of all government securities transactions, with the lion's share of 86% being dominated by the repo market. CBAR note transactions were up some 73% on 2010 figures over 2011, with transaction volumes coming in at AZN655 million. However, the real market force was on the repo market side, with transaction numbers up 86% on 2010 figures, though in terms of transaction size the figure was a more substantial 6.6 times higher at AZN5.78 billion.

DEVELOPMENT AHOY

The local capital markets are presently in the first stage of a three-phase plan aimed at deepening their role in the local economy and improving the range of financial tools available. A “state program on the development of the securities market in 2011-2020" was adopted in May 2011, and posits the modernization of the present securities market infrastructure over the 2011-2014 period as forming the first stage of this process. Further automation and transaction consolidation for the securities market is targeted for the 2015-2017 period, while the final phase stretching into 2020 will see the introduction of more complex tools and services to the markets.

Although still small in regional terms, especially considering the size of the capital markets in neighboring Iran, Russia, and Turkey, the BSE is looking to slowly but steadily develop itself as a source of funding for corporates as well as the state in the coming years. Through its membership of the Federation of Euro-Asian Stock Exchanges, and with the help of key shareholder the Istanbul Stock Exchange (ISE), the BSE hopes it will soon link up with the international financial scene and become a key mover of money in the economy.