Azerbaijan’s capital market in global instability

Baku, Azerbaijan, Jan. 24

By Maksim Tsurkov - Trend:

Trend Agency conducted an interview with the Chairman of the Azerbaijani State Securities Committee Rufat Aslanli.

- How do you assess Azerbaijan's capital market development level given the unstable situation on the world markets?

- The capital market is such a multi-faceted sector of the economy that the processes in this segment can not be assessed unambiguously: good or bad, positive or negative. There was a factor of external pressure in 2014 in the form of falling prices on some exchange goods, including energy resources. There was also a factor of devaluation of several national currencies, especially in a region where Azerbaijan is located.

A factor of geopolitical volatility in the global economy had a great impact. All this inevitably affected the Azerbaijani economy. But, the economy of the country and processes on Azerbaijan's capital markets showed great resistance to the external threats.

- How was the market developed given that in terms of the growth rate, the capital market turnover exceeded GDP growth rate? What was significant in 2014?

- I believe that the significant quantitative and qualitative results were achieved on the capital market of the country in 2014. It should be stressed that after the state program for the development of the securities market was adopted in 2011, the government and the State Securities Committee have been carrying out successive measures to reform all major aspects of the capital market for the past few years. As a result, we had significant qualitative changes in 2014.

First, a trading platform of derivative financial instruments began operating last year. The legal basis, an operating platform and capacity building were approved. The system was launched on July 21. As a result, the volume of transactions on commodity derivatives and foreign currency derivatives reached 4.3 billion AZN within six months. This is one-third of the total volume of transactions on the securities market.

Second, we were able to finally launch the liquidity mechanisms on the secondary market and competitive pricing on the exchange trading last year. This means that we created a market making institution in 2014. Big players, big financial companies take obligations to buy or sell specific securities at market prices.

The number of financial instruments provided with liquidity reached 13 in 2014. As a result, the liquidity of these securities and the demand for them increased on the secondary market, and subsequently on the primary market, especially on the corporate securities market. As a result, transactions in this market segment increased by 2.2 times.

There is also the third significant qualitative change. According to it, as a result of the structural changes, the country's market institutions and capital markets reproduce the values today within 15-year-activity of the capital market institutions in Azerbaijan. They ensure the financial stability of these institutions.

Until 2014, the income of the institutions such as Baku Stock Exchange (BSE) and depositary and clearing institutions was mainly formed due to the transactions with the state securities, including repo transactions and reverse repo with notes of the Central Bank of Azerbaijan. In a classical classification, these are the instruments of the monetary market, rather than the capital market.

In general, up to two-thirds of revenues of the BSE, Depository Center, and other major financial mediators were formed through the state instruments.

The state indirectly supported the development of these institutions. Starting from 2014, the transactions of the private corporate sector began to dominate and reached two-thirds of the transactions in the securities market. Accordingly, the revenues of the institutions increased.

These revenues are formed not with the trading in government instruments, but with trade of the private corporate sector. This led the capital markets as the element of the private entrepreneurship, or as the element of the market economy to reproduce the values which ensure the financial stability and stable functioning of these institutions.

- Transactions with bonds have also started in the stock market for financing such regional projects as Southern Gas Corridor...

- This was the first time not only in Azerbaijan's but also in the region's capital markets when such a large regional project was financed with the financial instruments that were issued in the regional platform of the financial markets. This is a very essential factor. However, I believe that this is an inefficient outcome.

This was the result of the essential qualitative changes when we improved the legislative framework of the market's functioning, in fact reestablished the operational and trading platforms, ensured irrevocable transactions, guaranteed rights for both investors and issuers.

As a result of all these institutional reforms, it became possible to finance such large projects through the instruments of Azerbaijan's capital market. Bonds have long been traded on the marketplaces. The only change is that the amount was big enough and the issuer was a very serious institution which is a very important player in the energy security sphere of Europe.

- Will such trends in the market development continue?

- Our current task is to achieve the coherence of these trends and to ensure that this segment would not only provide the non-oil sector of the economy with financial resources, but also ensure the institutional development of the institutions themselves with the earned revenues.

- What are the expectations regarding the development of the capital market in 2015?

- I believe that the market will persist. That's to say, we have quite a serious financial and institutional platform to respond to the challenges arising in international platforms and related to oil prices. Yes, our income to some extent is derived from the export of oil and energy, and the decrease in the price for this product by more than half within several months has a certain influence on economic processes. But on the other hand, we have reserve, however, I never mean the financial reserve which is accumulated in the State Oil Fund of Azerbaijan.

I believe that the reserve of the institutional strength and experience that we have gained surviving three major world crises in the short history of independence, as well as the human resources will allow to resist the new challenges as well. As for our sector [capital market], we have quite optimistic goals for 2015 towards which we are consistently moving. The improvement of the legislation [adopting the new law "On the Securities Market and Stock Exchanges" and a specific tax regime for transactions in the stock market], conducting debut IPO, the formation of the first stock index, the establishment of investment funds, the further development of the market maker institute, the expansion of trade in derivatives, etc. are among these goals.

Follow the author on Twitter: @MaksimTsurkov

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