Page 70 - bne_May 2021_20210601

70 Opinion
bne June 2021
AFC CAPITAL:
Uzbekistan’s Capital Markets Development Agency restructured as privatisation looms
Scott Osheroff in Tashkent
On April 13, 2021, President Shavkat Mirziyoyev
signed a sweeping decree “on measures for the further development of the capital market” in order to expedite the government’s goals of rapid reform by the end of 2023, and which includes having some major companies listed on the Toshkent Stock Exchange (TSE) in Tashkent added to the MSCI Frontier Index watchlist. This is something which we believe could be a major “game-changer”, since it will put Uzbekistan on the map for many foreign institutional investors.
On the same day, it was announced that the Capital Markets Development Agency (CMDA) would be dissolved. The CMDA was established in January 2019 with the purpose
of acting as the capital markets regulator and overseeing their development. While a surprise to the investment community, there will be little change in relation to how this affects investors, as the new regulator will continue from where the CMDA left off and hopefully move ahead at an even more rapid pace. As per the details of the presidential decree outlined below, we and most of the local investment community in Uzbekistan are very positive on this change, especially if the new regulator can execute even a portion
of its long list of goals.
The presidential decree highlights some of the lingering issues in the capital markets which need to be addressed. They include, among others:
• A low free-float among listed companies
• Low participation among institutional investors
• A high share of state-owned companies in market turnover • A low level of financial literacy among the Uzbek population
The first three points should be quite straightforward to resolve and have been in the pipeline for several years. Uzbekistan’s capital markets face a “chicken and egg” situation whereby the government has planned to privatise vast swathes of the economy through IPOs and SPOs, but if not conducted in an orderly fashion, and without foreign participation,
then the process will continue to be drawn out. The majority of listed companies on the TSE have some degree of state
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The Uzbek government has introduced sweeping reforms to bring the local stock market to life and prepare it as a privatisation platform
ownership, so in order to increase their free-floats the state’s participation can easily be privatised through secondary offerings at prevailing market prices or modest discounts. This should also increase institutional participation in the market, as many of these privatisations would be valued in terms of dollars and there is unlikely to be sufficient local demand to absorb the supply of shares.
Some of the government’s more notable KPIs to transform the capital markets by 2023 include:
• Increasing the free-float on the TSE to 5% of GDP
• Providing education on financial literacy to 40,000 local
minority investors
The free-float of the TSE is estimated at 0.4% of GDP, or less than 4% of total market capitalisation of the exchange, while the current market capitalisation of the exchange to GDP
is 11.5%. If the free-float is to equal 5% of GDP, this would
“The free-float of the TSE is estimated at 0.4% of GDP, or less than 4% of total market capitalisation of the exchange, while the current market capitalisation of the exchange to GDP is 11.5%”
equate to roughly $2.6bn of equity value, or 43% of the current market capitalisation of the stock exchange. Clearly, in order to achieve its goal, the government needs to expedite its privatisation process of fully state-owned enterprises as well as sell its participating stakes in already listed equities. If this can be achieved, it would be a “game-changer” for the investment landscape in Uzbekistan and create a significantly more liquid market with a much larger local and foreign investor base,