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Azerbaijan 2016 | FINANCE | REVIEW: CAPITAL MARKETS

As Azerbaijan grapples with the knock-on effects of low hydrocarbon prices, the Baku Stock Exchange (BSE) finds itself at the center of the country's efforts to stave off a budget deficit this year. In January, the government announced plans to sell $500 million worth of bonds on the BSE.

The Baku Stock Exchange (BSE), established in 2000 as a closed joint-stock trading company with 20 shareholders, finds itself at the center of the government's efforts to counter an expected budget deficit this year. The BSE is a key tool for attracting investment and raising funds in an era of low oil prices and challenging energy markets internationally. Yet for the country's capital markets, this is also an opportunity to re-invigorate the bourse and stimulate stocks across the BSE's shareholders. The country is mid-way through an 8-year program of modernization and reform, so this is also a good moment to test the waters and ensure the system is on course to meet its stringent targets come 2020.

In January, the Ministry of Finance announced plans to sell $500 million in sovereign bonds on the domestic market. This forms part of a crucial effort to cover the forecasted budget deficit that stems from the fallen energy prices. The government's prospectus is made up of $300 million in short-term bonds and $200 million in mid-term bonds.

Overall, investments in Azerbaijan increased MoM by 8.3% in February 2016 compared to January 2016. Azerbaijan's State Statistics Committee (SSC) announced that, over these two months, total investments in the country amounted to AZN1.8 billion (or $1.14 billion based on an exchange rate of AZN1.59 to the dollar). These figures are, however, 31.1% lower than the same period in 2015. FDI accounted for AZN1.2 billion of all investments. The government and the BSE are working closely to increase the BSE's role in raising capital and FDI. In March 2016, the State Oil Fund of Azerbaijan (SOFAZ) sold $500 million worth of foreign exchange bonds.

The BSE is promoted by Invest-Az and regulated by the Ministry of Finance. In 2011, the government set down the State Program on the Development of the Securities Market of the Republic of Azerbaijan running to 2020. The long-term program aims to update the bourse and generate greater capitalization capability through an ongoing investment of $12 million. The World Bank's Capital Markets Modernization Project for Azerbaijan also runs until 2020.

Trading is dominated by T-Notes issued by the Ministry of Finance, each with a maturity of one month to three years. One of the most important listings of 2015 was that of credit organization FinEx, which was granted a license to raise $400,000 via 800 different bonds, each with a par value of $500 and underwritten by Texnika Capital Management Ltd. The bonds carry a fixed rate of 14%, with earnings paid quarterly and a total shelf-life of 720 days. Texnika Capital Management has been an influential player on the BSE since its founding in 2004. In 2007, the company was also licensed by the State Securities Committee to render deals and provide brokering services. The company is a member of the BSE and maintains an equity shareholding of 5.5%.

In February 2016, UniCapital overtook InvestAz to become the number one broker on the BSE, with investments of AZN117.4 million. InvestAz is the second largest investor, with stocks of AZN41.7 million. AzFinance comes third, with AZN13.1 million invested, and the fourth-largest investor is Kapital Management (AZN1.4 million). PASHA, which dominated the market in 2015, fell out of the top-five even though in December 2015 the company posted a holding of AZN50 million on the BSE. Other notable companies listed on the BSE include BoB Broker, Yapikredi Invest, Chelsea Capital, Standard Capital, and Xalq Capital.