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Uzbekistan is planning an overhaul of its dormant capital markets and a new agency is leading the charge. Established in January of this year, the Capital Markets Development Agency (CMDA) has quickly become a key actor in the country’s economic reforms.

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CMDA is led by Atabek Nazirov, a former banker with Goldman Sachs and the European Bank for Reconstruction and Development (EBRD) who is among the cadre of successful Uzbek professionals encouraged by the administration of President Shavkat Mirziyoyev to return to Tashkent from abroad to help implement economic reforms.

Addressing an audience of bankers and investors at the Uzbek embassy in London in September, Nazirov laid out the ambitious targets he has set for his agency, previewing a strategy that has been developed with input from organizations such as EBRD, the International Finance Corporation, and the Securities and Exchange Commission of the United States.

The Tashkent Stock Exchange was established in 1994, but its market capitalization is a mere 5.3 percent of GDP, compared to 21.7 percent in neighboring Kazakhstan and 54.2 percent in Vietnam, a recent darling of emerging markets investors.

Nazirov wants to boost the total market capitalization of the stock exchange from the current level of just under $5 billion to $15 billion by 2025. To achieve this target, CMDA’s development strategy calls for both an increase in the minimum percentage of free float for listed companies, and envisions a new wave of initial and secondary public offerings related to the government's broader privatization drive.

The Tashkent Stock Exchange is currently dominated by state-owned banks, which are legally mandated to list shares. These shares account for 86 percent of the trading stocks on the exchange, limiting liquidity and the appeal of the exchange for foreign investors, who hold just two percent of the shares.

According to a synopsis of the agency’s strategy shared with Eurasian Investor, CMDA estimates that the forthcoming IPOs of ten major state enterprises, drawn from the energy, agriculture, mining, and manufacturing sectors, with a combined value of $13 billion, could “increase the free float by additional $1.3 billion.” These ten enterprises are drawn from a larger pool of nearly thirty state-owned enterprises earmarked for partial or full privatization.

In parallel to its efforts to diversify the pool of companies issuing securities on the exchange, CMDA is also seeking to broaden the pool of both domestic and foreign investors. An oversubscribed debut eurobond offering in February served to demonstrate interest in the Uzbek market among international institutional investors.

But the agency is also seeking to encourage the development of local retail investing and pension funds in order to ensure that Uzbekistan’s working and middle classes can participate in the expansion of the stock market and benefit from the privatization of once exclusively state-owned firms.

When asked whether the major Uzbek companies would be deterred by the burdens of corporate governance and investor relations entailed in any public offering, Nazirov pointed to the forthcoming public offerings of Sanoat Qurilish Bank, Asia Alliance Bank and Jizzax Plastmass, a plastics manufacturer. CMDA, which is the markets regulator, is working with these companies in tandem with their external consultants in order to help navigate recent and forthcoming regulatory changes.

Presently, Uzbek companies are entirely dependent on bank loans to finance new investment, making it difficult for major enterprises to raise the significant funds necessary for much-needed upgrades to fixed capital. Nazirov believes that the country’s largest enterprises will have no choice but to issue securities in order to meet the financing requirements of their own transformation plans, making CMDA’s mission pivotal for the broader campaign of economic reform.

In a sign of this mission’s importance, President Mirziyoyev convened a meeting last week of relevant ministries and agencies involved in the development of the country’s capital markets. A consolidation of relevant laws, acts, and decrees will result in the establishment of a single consolidated capital markets code by the end of next year.

As is the case for so many facets of Uzbekistan’s reform agenda, the fundamental barrier of CMDA’s development strategy is no longer the absence of a clear roadmap or institutional authority, but rather a more basic issue of human capital. The agency has been empowered with a staff of 50, but beyond its offices, the talent pool of the financial sector remains small.

According to a statement provided to Eurasian Investor by CMDA, there are “only around 300 qualified securities markets participants have relevant certificates, which is considerably less compared compared to developed countries.” The agency intends to collaborate with local schools and universities to increase overall financial literacy while also providing clearer pathways for career development “to stimulate growth in domestic broker-dealer industry.” CMDA recently signed a memorandum with Columbia University to organize a series of finance seminars in Tashkent.

CMDA will launch its new development strategy at a conference it is hosting in Tashkent on November 15. This will be followed by the agency’s participation in an international investment forum in London on November 27.

Photo: International Press Club

link: https://www.eurasianinvestor.com/analysis-articles/2019/10/14/uzbekistan-targets-tripling-of-stock-exchange-market-cap-by-2025


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