Imagine a future where people wake up in the historic Silk Road city of Tashkent — and across the country of Uzbekistan — switch on their televisions and check the prices of their share portfolios. Where the local stock exchange not only acts as a conduit for foreign and domestic investment into listed companies, among them newly privatised national champions, but also enables the country’s population to share in its growing prosperity. 

That's the vision that was sketched by Atabek Nazirov, director of Uzbekistan’s Capital Markets Development Agency (CAMA) at a briefing with foreign journalists in Tashkent on November 14. He acknowledges that this concept — based on his observations of widespread retail investment in the US — is a long way off for Uzbekistan, yet the idea illustrates the ambitions of those looking to develop the local capital markets, and how this is seen as an integral part of Uzbekistan’s future economic development. 

CAMA is currently drawing up a five-year capital markets development strategy to run through to 2025. It has top level support including from President Shavkat Mirziyoyev, who has led a steady opening up of the long-closed Uzbek economy since coming to power in late 2016.

“The agenda for the Capital Markets Development Agency is to give the kick-start to an industry which has been silent and hidden away from everyone’s eyes for 27 years. We are now defining a large programme that includes a significant influx of new securities, private and public, into the market,” says Nazirov, a former senior regional banker at the European Bank for Reconstruction and Development (EBRD), who also has experience at Goldman Sachs and JP Morgan in New York. 

“The development strategy entails a very comprehensive roadmap, a very holistic approach and a five-year plan with specific deliverables for every year. The goal by end-2025 is to have capital markets big enough to attract not only institutional and international investors, but to become a key component of domestic wealth creation infrastructure.” 

Privatisations in the pipeline

CAMA is working in close collaboration with another government agency, the State Asset Management Agency (SAMA), which manages the state’s shareholdings in enterprises. SAMA is preparing for full or partial privatisations of its portfolio and stakes in many companies — including crown jewels of the Uzbek economy like oil and gas company Uzbekneftgaz and flag carrier Uzbekistan Airways — are expected to be listed on the Tashkent Stock Exchange. 

The privatisation strategy is due to be developed by February 1, 2020, after which it will become clear which companies will be privatised and how, and the size of the stakes the government plans to part with. 

Then the work will begin. After February 1, says SAMA director Sunatulla Bekenov, a former government minister, “we will not be discussing, we will be acting”. 

He stresses that there is already a common understanding that stakes in state companies need to be put up for sale. “I don’t know a single person in the government who will say we should hold onto 100% of shares in any company,” he says.

In total there are plans to fully or partially privatise 240 companies, with the aim of reducing the number of SOEs by 50%. Rather than a one size fits all approach, "for every company an individual approach will be used in deciding how many shares will be held and how the privatisation will be organised,” says Bekenov. 

IPOs or SPOs will be held for at least 20 SOEs, with some candidates such as banks Aloqabank and SQB, the Jizzak Plastmassa plastics factory and the Uzbek Commodity Exchange already identified. Pilot projects, which Bekenov says were “very successful”, were carried out with the IPO of glass producer Kvarts in 2018 and an SPO of the Kokand Mechanical Plant. 

While the government plans to hold on to stakes in strategically important companies such as Uzbekistan Airways, Uzbekneftegaz, Navoi Mining Complex and Uzbekistan Railways, at least part of each company will be put up for sale. The authorities are looking for strategic investors for other assets such as some of Uzbekistan’s major chemical plants. 

What all the privatisations will have in common, as stressed by Bekenov, is that the process will be public and open, and will involve independent consultants. This is in keeping with the new emphasis in Uzbekistan on transparency and openness, as government officials seek to overcome the legacy of the country’s 27 years under the late dictator Islam Karimov, and open the economy up for investment. 

Better management 

Tashkent isn’t aiming for privatisation for its own sake but as a means to improve the performance of enterprises with state shareholdings. “We will not be able to achieve this unless we take the state owned enterprises public,” says Bekenov. “Even for those enterprises where we want to keep some of the shares in the hands of the state, we need to issue shares to introduce them to the stock exchange. Only through rendering enterprises public can we succeed in developing corporate governance.” 

“My expectation is that most of the funds from the privatisations will go to the companies to finance growth and modernisation,” said Nazirov. “The main drivers are transparency, corporate governance standards, bringing in top class managers, new employment, keeping up our GDP growth and bringing it to double digits. The capital market rules are very clear: the best people who can employ capital will be awarded capital. Privatisations will go to efficient asset users.” 

Explaining why the capital markets are so important for Uzbekistan, Nazirov tells journalists: “Without developing healthy, sound domestic capital markets, we will have limits on how we can grow our economy because the capital markets provide one of the main sources of financing for the economy. Second, and most important, they provide a mechanism for wealth creation of the nation.”

While not expecting to replicate the US experience of retail investment exactly, Nazirov stresses that “we believe it will be impossible to develop the domestic capital markets without building a domestic investor base”. That includes encouraging retail investment as well as ensuring pension and insurance funds are able to invest. In creating a domestic investor base, Uzbekistan has the advantage of its population of over 32mn, half of Central Asia’s entire population. 

At present, activity on the Tashkent stock exchange is relatively small compared to the size of the economy. The free float adjusted market cap is less than $500mn, and daily transactions amount to around $100,000. The EBRD puts stock exchange turnover at around 5% of Uzbekistan’s GDP compared an average across the development bank’s countries of operation of around 20%.

For some of the largest companies, it may therefore be necessary to look to international markets to raise funds for development. According to Nazirov, while the primary target is to conduct IPOs on the domestic market — the goal of the programme is, after all, to develop the local market — “obviously for larger companies where we have to raise $100mn or half a billion dollars then we will have to look for additional exchanges to do dual listings.”

Intense preparations 

From SAMA’s side, preparations for the upcoming privatisations of its portfolio of companies include restructuring and improving corporate governance. 

Meanwhile, for CAMA the development of the capital markets require a complete overhaul of relevant legislation and regulations. “Unfortunately our existing regulation that oversees the cap markets is very complex,” Nazirov explains. Between now and the end of 2020 more than 100 different regulations, decrees and laws will be replaced with a single capital markets law. 

Expanding further on some of the concrete steps to be taken at the International Conference on The Role of Capital Markets in economic development of Uzbekistan on November 15, Nazirov stressed the need to develop appropriate tools to defend investor rights since "if investors don’t feel protected it will be difficult to bring them in as long term partners.”

The architects of Uzbekistan’s capital market reforms will be working closely with the parliament as they seek to pass the package of reforms. The role of the parliament has already become more important, and with elections coming up in December, the next parliament is no longer expected to be a rubber-stamping body like legislative chambers experienced in the past. 

Speaking at the conference, Sodiq Safoev, First Deputy Chairman of the Senate, said that “both the government and the parliament are committed to creating all conditions necessary for fostering the growth of the local capital markets”. Legislative steps already taken include strengthening protection for minority shareholders, which pushed Uzbekistan up eight places in that category of the World Bank’s 2020 Doing Business ranking. 

The development of Uzbekistan’s capital markets is part of a broader set of reforms, concerning greater transparency, openness, tax reform and anti-corruption, all of which contribute to encouraging capital markets investment and development — not least because investors need to be able to obtain reliable and accurate information on the companies they plan to invest into. 

“We understand that in order to develop effective capital markets it is essential that policy makers provide all market participants with timely, accurate and detailed information and ensure the coverage of introduced reforms to receive comprehensive feedback. This is crucial for making successful investment decisions, and building trust and market confidence among market players,” said Saida Mirziyoyeva, head of the Agency of Information and Mass Communication, set up to ensure transparency of government entities and SOEs. 

And voicing a sentiment that was repeated many times in Tashkent, Bekenov stressed the irreversibility of the ongoing reforms. “Now we have reached the stage of reform where there is no way back in the development of the capital markets. We have all the pre-conditions including the will of the president, and a single vision of all people responsible for this segment.”

The investor perspective 

The conference took place at Inha University in Tashkent and the main auditorium was packed out with standing room only for late arrivals — evidence of the strong interest in the newly open Uzbek economy. Among the delegates were foreign investors who had flown in from Europe and North America, attracted by the prospect of some of Uzbekistan’s most appealing companies coming up for sale. There was also a desire to assess how serious the government was about its reforms, and how realistic are the plans to launch companies onto the public market, as well as the possible timings of IPOs and SPOs. 

In his keynote remarks, Irackly Mtibelishvily, chairman of Citibank CIB in CEEMEA, described the “unique situation” in Uzbekistan with the large number of state-controlled companies currently being transformed and bought to the market. At the same time, Mtibelishvily stressed the need for good governance at such companies “because you are competing with companies from other markets for capital from the same pool of resources”.

Ayuna Nechaeva, director, head of Europe — primary markets at the London Stock Exchange, took a positive view of Uzbekistan as "one untapped high growth market that is hugely attractive”, not least given the volatility in other emerging markets, and the fallout elsewhere from the US-China trade war. 

Delving into the details, Elena Khisamova, vice-president, head of equity capital markets advisory at Russia’s Gazprombank, looked at where investor appetite might lie ahead of the first IPOs, first singling out the oil and gas sector which she called an “excellent candidate for privatisations”. “Metals and mining is also well developed and there is interest amid the global deterioration of the resource base,” Khisamova added. “And last but not least, we believe financial institutions are attractive. Uzbekistan has really high growth prospects, and we believe banks can be a proxy for investors who want exposure to Uzbekistan in the same way they buy into Sberbank to gain exposure to Russia.”

While the details still have to be hammered out between now and next February, companies in all of these sectors are expected to come onto the market in the next few years, as Uzbekistan continues its opening up to investors.