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 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 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, which we believe will help transform Uzbekistan’s capital markets into the largest in Central Asia.

In addition to the largest cement plant in Uzbekistan, Qizilqum Cement (TSE: QZSM), and glass manufacturer Kvarts (TSE: KVTS), the presidential decree highlights the following companies to be privatised out to 2023:

• Uzmetkombinat (a listed steel producer which is slated for an international dual listing)
• Almalyk Mining (a significant gold, silver and copper miner)
• Navoi Metallurgical Mining Kombinat (a mining conglomerate that owns the largest open-cast gold mine in the world – Muruntau)
• Uzbekistan Airways (the national airline)
• Uzbekneftegaz (the state-owned oil & gas monopoly)
• Uztransgaz (a natural gas distribution/pipeline operator)
• Halk Bank 
• Agro Bank
• Microcredit Bank
• Uzagrosugurta (a top-5 insurance company with the largest branch network)
• Kurilishmashlizing (a construction machinery leasing business)
• Uzavtosanoat (state-owned auto manufacturer and producer of Chevrolet cars)

The sea change in the government’s attitude in April towards many of these companies is remarkable considering that most of them were previously regarded as strategic, and therefore had to remain state-owned.

In order to achieve the above targets, the government is planning to pass a new capital markets law by the end of 2021 which, among other things, is expected to improve the efficiency of conducting IPOs and SPOs, designate the functions of underwriters, dramatically improve broad legislation for the protection of minority investors, enhance accounting and listing requirements, introduce Sukuk (Islamic) bonds, permit foreigners to invest in government bonds (currently not permitted), and perhaps most importantly, simplify the burdensome account-opening procedures for investors seeking to participate in the stock market and possibly go so far as to digitise the process.

The risks of capital markets development

While the presidential decree is very exciting and exactly what we have been anticipating, we will be watching closely to see how all of this positive news transpires, as execution will be paramount.

A former and just as aggressive privatisation plan was announced between 2016 and 2020 in Kazakhstan, Uzbekistan’s northern neighbour. This is what originally attracted Thomas and myself to the region, as Kazakhstan had planned to privatise vast swathes of the economy in order to decrease the government’s contribution of GDP from 70% to less than 50%. This included the privatisation of over 900 assets and companies, including the IPOs of KazPost, the national post office, Air Astana, the national airline, KazMunayGaz, the national oil & gas company, and Kazatomprom, the state uranium miner, by 2020. However, the process could be branded a failure, as it has largely been pushed back, and of the four planned IPOs, only Kazatomprom became listed. We hope Uzbekistan is able to execute its privatisation plans more effectively.