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  KAZAKHSTAN International Business Magazine №1, 2000
 Kazakhstan’s Securities Market in 2000: Opportunities and Expectations
Kazakhstan’s Securities Market in 2000: Opportunities and Expectations
Aidan Karibzhanov, Managing Director of Kazkommertsbank, General Director of Kazkommerts Securities
Kazakhstan’s securities market has been an object for criticism and pessimistic remarks recently. We believe that this attitude is mainly due to public disappointment in the stock exchange. Some psychologists think the effect of ‘an unfulfilled promise’ was created. This situation is unjust, for the real stock exchange is being compared to an ideal model of it, which is exclusively derived by the whole majority from books and Western films. What should be expected from the stock exchange in reality?
Stock Exchange Functions
The term ‘stock exchange’ is complex and can mislead anyone. Let us try to classify the functions of a stock exchange.
• A stock exchange as a place for effecting transactions. This is the function of the ‘Arbiter in the Field’. Accuracy and objectivity are needed here.
• A stock exchange as a place for professional brokers to earn money.
• A stock exchange as a place for receiving new funds.
The stock exchange of Kazakhstan has developed exactly in this order, and thus we are going to discuss the functions.
The Role of the Stock Exchange during the Formation of Rights of Ownership
Let us look back and remember the history of the formation of Kazakhstan’s stock exchange, inasmuch as it numbers just several years.
The main occurrence of the last decade was the consolidation of rights of ownership on many assets in the country. This had an immediate influence on the formation of the securities market in Kazakhstan.
Joint-stock ownership has many advantages. It is far from accidental that joint-stock companies became the new form of the most renowned businesses’ existence. The necessity for creating a stock exchange as a mechanism for transmitting rights of ownership emerged along with this process. However, such transactions at a stock exchange have a once-only nature, since after privatisation a strategic investor starts working with the company, and there is no stock turnover on the market.
Therefore, the participants of privatisation transactions were very reluctant to use the stock exchange, and avoided it in every way possible, sharply criticizing it for shortcomings that were, however, quite natural. The legislation that had formed in the West over many years was created in Kazakhstan in the course of mere months. In these conditions, the law-makers deserve good praise, since the result has exceeded all the expectations of the practitioners, and has overcome the distrust of sceptics, given that it was the first experience.
The stock exchange’s basic problem in effecting transactions is that the simple issues have already been settled, whereas the complex ones remain unresolved. Among those urgently needing to be resolved is fine-tuning of legislation to major transactions, the specific nature of various economic sectors (for instance, issues of deposit estimation always turn up in the mineral resources sector), as well as the requirements of confidentiality and taxation efficiency. We believe this problem will be resolved in practice. However, practitioners should be granted the right to offer their own ways of resolving the existing problems.
These processes mentioned above determined the first stage of the stock exchange’s development.
Trading Securities On Stock Exchange
The situation drastically changed at the beginning of 1997. At the time, the Kazakhstani stock exchange lived through the indeed ‘tectonic’ changes: the country received a sovereign rating. In simple words, receiving the rating meant that all the professional buyers of securities, the majority of which were foreigners, were given a reference to price for the securities. Following this, Kazakhstan issued its first eurobonds on the international market, which caused an enthusiasm of buyers. As it turned out, ‘they were expecting us’.
Later, the market burst out. One of the reasons for this was the rapid growth of the stock exchange in neighboring Russia. Investors often purchased stocks without knowing anything about a company, except its name and the sector it operated in. In three years, the shortcomings of such market development appeared: after the breakneck growth and then the equally rapid decline, it was not only profits and successes that were remembered, but rather omissions and reproaches.
In the course of the next two years, the stock exchange remained practically dead. However, the situation has started changing for the better. It seems that the following conclusions have been made: now, investors study companies in detail before purchasing securities. This is when the strict regulations of listing and the National Securities Committee protecting the investor from low-quality securities are useful and start reviving trust in the securities market in Kazakhstan. Although some speculative transactions remain, they do not determine the general disposition. A new, quite interesting stage of the stock exchange’s development has arrived.
The Stock Exchange as a New Source of Financing
Since the beginning of the year, a new trend has appeared, and it is hard to overestimate it. Major Kazakhstani companies are seriously thinking about attracting capital through the Kazakhstani stock exchange. This might also have been stipulated by the crisis, when foreign credits grew either excessively expensive or impossible. We expect the stock exchange to display considerable growth this year. There are a number of critical conditions for this.
Different Structure of Buyers
Buyers are necessary for forming a stock exchange. In 1997, it was mainly speculators (in the professional, rather than the abusive sense of this word). The situation has changed since then. New buyers with fundamentally different interests and priorities have appeared on the market. These are pension accumulation funds. Let us make a more detailed review of their role.
Activities of the Pension Accumulation Funds
Notwithstanding sceptic remarks, non-state pension funds became the major gamblers on the stock exchange. Today, their portfolio in many respects determines the general profile of financial investment in the country. All the players of the financial market are interested in the viability of accumulation funds. Fortunately, the apprehension that the authorities’ inclination to ‘get into the pocket’ of non-state funds would become stronger, as the budget problems grew, was not justified. For instance, this could be done by increasing the minimum requirements to invest capital of these funds in short-term tenge state bonds, or by influencing their activities in a different way. The investment accumulation funds set the mood and interest in investment.
Thus, the natural long-term investment horizons of the accumulation funds allow issuers to move from discussing terms of several-months to several-years. This is especially important for production companies engaged in producing raw materials. It is no secret that all the serious production projects have a considerably long payback period, but still remain quite attractive.
The public discussions early this year concerning the operations of pension funds attracted attention to the basic indicator of activities of any fund, that is, profitability. Competition among the managing companies will inevitably lead to the necessity for more profitable instruments.
It is important that the quest for profitability does not bring to life overly risky instruments. However, there is no need in denying everything new. New instruments might appear on the market, which will be similar or absolutely identical to Western structured notes and derivatives, although it is impossible to foretell how soon this will happen. At the same time, it is impossible to underestimate the role that regulating bodies play in this process. Hopefully, they will not take up extreme positions in this aspect. The total absence of restrictions will make the depositors of pension accumulation funds vulnerable, whilst the straightforward prohibition of everything that does not comply with definitions of the already circulating securities will not be able to live long or benefit the market development.
This can already be confirmed in practice: in 1999, the profitability of non-state funds, which have more options to chose from among investment instruments than state funds, was higher by an annual 14%-20%.
Besides the new market participants, the demand for instruments has also changed. Stocks dominated in the market at the last stage, but now it is prime time for debts.
The impetuous crisis of 1997-1999 progressed in a certain order. At first, the demand for the highest-risk securities disappeared, then went the less risky securities, and, at one moment, all the Kazakhstani securities had become temporarily too risky for investors. The revival of interest in Kazakhstani securities is now developing vice versa. The start was founded by the new issue of Kazakhstan’s sovereign eurobonds in October 1999. Later, the bonds of the Mangistau region, and those of the cities Almaty and Astana, were quite successfully placed. On the assumption of this logic, it can be expected that demand for debts of the major corporate borrowers will be activated. Only when investors are sure there will be no delinquencies and non-payment under debts, will the demand for stocks return.

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