Nurbek Elebaev, Ph.D. (Econ.), Managing Director of the Niet-Araket Financial Consulting Company, Chairman of the Board of Directors of the Kyrgyz Stock Exchange (Bishkek, Kyrgyzstan)

I. Past and Present

The securities market took shape in the country as a result of mass privatization, which started in 1994, although such concepts as shares, shareholders, joint stock companies, bills and bonds had come into economic usage somewhat earlier. Pilot or model privatization began in 1990, and in 1993 the government was already issuing and placing debt securities in the form of government treasury bills, notes and bonds. At that time, however, their use was fairly limited. People knew very little about them and had not yet awakened to the importance of their acquisition.

Such an awareness began to grow and to take hold of human minds in the process of mass privatization, when every citizen received a certain number of privatization coupons and was faced with the dilemma of whether to sell them or to invest them in the shares of newly established corporations.

The most active and enterprising people explored the new possibilities on their own and plotted their own investment course, but the majority were still in doubt and required guidance. Hence the objective need to develop the infrastructure of the securities market. Newly launched specialized investment funds, brokers and registrars were stepping up their activities in the country. By the beginning of 1995, the republic already had over 20 investment funds and dozens of brokers and dealers. This process culminated in 1994 in the establishment of the Kyrgyz Stock Exchange as an organized market, which began officially operating as an exchange on 25 May, 1995. It started out with active trade in privatization coupons through its Coupon Trading Center, and in the second half of 1995 began successfully dealing in shares, with total transaction volumes exceeding 600 thou soms by the end of the year.

At that time, the Stock Exchange operated not only as an organizer of trading, but also as a clearing and depository system under a two in one arrangement typical of incipient markets with small trading volumes.

In October 1997, on the initiative of the Stock Exchange and a number of banks and brokerage firms, a Central Depository was set up in the country as an independent institution for safekeeping and maintaining records of securities traded on the stock exchange and for clearing transactions, which substantially strengthened the securities market, improved its organization and increased its transparency. In addition, the establishment of that institution helped to raise the level of investor confidence in transactions performed in this market.

A special point to note here is that the establishment of two such highly important institutions of the securities market as the Stock Exchange and the Central Depository made its structure integral and complete, which served to enhance the safety of investor activities in the market, while the securities traded here increased the appeal of the Kyrgyz economy as a whole. Another reason why the two institutions were so important was that the mass privatization process at the time was at its peak. In particular, blocks of shares from the initial public offerings (registered in 1994) of the most prestigious and attractive monopoly companiesKyrgyzenergo, Kyrgyztelecom, Kyrgyz Aba Zholdoru and Kyrgyzgazmunaizatwere put up for sale at coupon auctions.

The largest number of shares was issued in 1997. That is why it is no accident (see Table 1) that in 1997 the ratio of the overall volume of issue of these corporate securities to the republics gross domestic product reached a maximum of 37%. In 1998, when the process of placement and sale of monopoly company shares was nearing completion, this indicator was down to 6.31%, with a further decline in subsequent years.

Table 1

Issue of Corporate Securities in Relation to GDP in 1996-2002








GDP (million soms)








Volume of issue of corporate securities (million soms)








Volume of issue as a share of GDP (%)








Let us note by way of comparison that in the developed countries this indicator is over 100%, and in the countries of the former Soviet Union that have made the greatest headway in developing the stock market it is already several times higher than in Kyrgyzstan.

Nevertheless, it was in 1997 that the republic reached a peak in the development of the economy in general and of the corporate securities market in particular. And who knows how that process would have developed had we not found ourselves in the zone of influence of the Southeast Asian and then of the Russian economic crisis. If we add to that the purely domestic situation, which could be summed up by saying that the mass privatization process appeared to have been completed, while the government was in no hurry to continue selling off monopolists or other facilities attractive to investors, the crisis phenomena in the countrys securities market will be easy to understand. Thus, in 1999 the volume of issued corporate securities was more than 2.5 times lower than in 1998 (see Table 1).

In order to prevent the securities market from collapsing, the republics president signed a decree (10 May, 1999) under which all transactions involving shares of open joint stock companies had to be registered with organizers of trading. Although these measures were criticized by experts, issuers and a definite part of professional market participants, they made it possible not only to maintain the newly created market infrastructure (primarily the Stock Exchange and the Central Depository), but also to apply preventive measures with greater confidence so as to pave the way for the further development of the market. As a result, the volume of trade on the Stock Exchange stabilized, and in 1999 it was already more than 2.5 times higher than in the preceding year, while in 2000 the number of transactions multiplied more than four times (see Fig. 1).

Fig. 1. Volume and Number of Transactions on the Kyrgyz Stock Exchange in 1995-2001

In 2000-2002, the volume of securities trading on the Stock Exchange remained at about the same level. Alongside shares, in 2001 the Exchange began to deal in corporate bonds. That year, their share in the total trading volume was 5.9%, and in 2002 it rose to 9.3%, or 93.99m soms.

As regards government securities, the practice of their distribution and trading in the republic has its specific features. Thus, approval has been given to the following types of government securities: government treasury bills, government treasury obligations, government medium-term coupon bonds, and government securities (reschedulings). But medium-term coupon bonds have not been issued to date. Government securities (reschedulings) cover the governments restructured debt to the National Bank issued in the form of treasury bills and treasury obligations in favor of the Bank. Government treasury obligations are documentary securities in written form all transactions in which are registered by the Finance Ministry.

So, government treasury bills are the only type of government securities freely traded in the market. These are discount book-entry securities issued by the government and distributed on a weekly basis through auctions held by the National Bank, the governments general agent in servicing the issue of these securities. Fifteen commercial banks in the republic act as primary dealers at these auctions, and the demand for treasury bills is usually far in excess of supply (see Fig. 2).

Fig. 2. Supply and Demand for Government Treasury Bills and Budget Receipts from Their Distribution in 1999-2002 (million soms)

In 1998 and 1999, the yield on these securities was fairly high, falling slightly in 2000 and plunging by more than two-thirds in 2001. Nevertheless, the treasury bill distribution volume in 2001 even increased, which is yet another indication of stable investor interest in these bills. Yields are highest for twelve-month bills, followed by six and three-month bills. In late May 2003, weighted average yields came to 7.85% for three-month bills, 11.65% for six-month bills, and 12.95% for twelve-month bills. In the secondary interbank market, most treasury bill transactions involve twelve-month bills.

All this makes it clear that the government securities market in Kyrgyzstan operates only through the trading floor of the National Bank and through the electronic trading system organized by it. As regards the corporate securities market, it operates through the Stock Exchange and the Exchange Trading System in the city of Osh (which covers a narrow range of issuers and has a small trading volume). The securities markets of neighboring countries obviously differ from that of Kyrgyzstan. First, stock exchanges, say, in Kazakhstan and Russia handle not only government securities (in addition to corporate securities), but also foreign exchange. Second, trade in securities and foreign exchange is by its very nature commercial activity, so that it is something of a mystery why in Kyrgyzstan such trade is carried on by the countrys main bank, which has the status of its central government monetary and credit institution. In this respect, earlier excuses that the Stock Exchange is technically unprepared for such business are no longer valid, since the Exchange now has a new electronic trading system which enables it to handle not only government treasury bills and bonds, but also foreign exchange plus futures and options as derivatives of securities, commodities and currency.

That is why in the next section of this article I would like to set forth a view that is distinct from the official position. One should note here that this is not only my own view, but also the opinion of most professional participants in the securities market.

II. Problems and Priorities

The weakness of the securities market is due to a number of objective and subjective factors. The most characteristic of these is the continuing and even intensifying decline in production, primarily in the industrial sector. In 2001, the volume index of industrial production (without the Kumtor deposit) was 94% in relation to 1997. The fact that the decline in production in industry as a whole was not very significant is explained by the increase, however marginal, in the production of electric power and metal products. At the same time, in 2001 this index in the fuel industry was 73% of the 1997 level, in the light industry it fell in that period by 11.7%, in the building materials industry it was 85.7%, and in the food industry, 90.8%.

In 2002, production in some branches of industry continued to decline in volume terms. In the metallurgical industry, for example, that index fell by 33.2%, which was due to a drop in the production of mercury by 8.4%, antimony by 37.4%, and oxides, rare earth metals and single-crystalline silicon by more than 90%. That year brought a decline even in the production of electric power: by an average of 13.4% at hydropower stations and 8.8% at thermal stations. In addition, the manufacture of electric motors fell by 77.6%, that of transformer plants and electrical equipment by 50.4%, enameled wire by 23.6%, and computers by 45.6%.

The downturn in production, which has had a significant effect on stock market indicators, is aggravated by government privatization policy. Unfortunately, the pace of privatization set in 1997, when foreign and local investors were given wide access to the countrys key economic facilities (monopoly enterprises and other steadily operating companies), has not been maintained. For six years now privatization has been marking time. Announced tenders for the further privatization of Kyrgyztelecom have been twice postponed. In view of the long-drawn-out restructuring of JSC Kyrgyzenergo, investors have not responded to the offer to buy JSC Severelektro, a joint stock company spun off from the latter. Nor have there been any positive changes in this matter as a result of restructuring at JSC Kyrgyz Aba Zholdoru and Kyrgyzgazmunaizat.

Another factor behind the decline in the corporate bond market was, in my view, the much too aggressive efforts in 1997-2000 to initiate bankruptcy proceedings against companies established through privatization. Thus, 108 joint stock companies were declared bankrupt. It is fortunate that only 58 of these were subjected to the special administration procedure (as the republics President Askar Akaev aptly put it, an army of new predators), 10 joint stock companies were reorganized, and in all the other cases proceedings were terminated.

Such a policy in the field of privatization and development of corporate governance has led to a substantial reduction in foreign direct investment in the corporate stock of privatized issuers. Thus, the investment boom caused by the privatization of monopoly enterprises (1997) gave way to a steady decline in annual foreign direct investment in the economy. The figure was $136m in 1998, $108m in 1999 (26.5%), $90m in 2000 (16.7%), $74m in 2001 (17.8%), and $72m in 2002 (2.0%).

The overall pattern of investment, including investment in corporate stock in the primary and secondary securities markets, is presented in Fig. 3.

Fig. 3. Foreign Investment in Corporate Stock in the Kyrgyz Republic in 1993-2002 (million soms)

The chart shows that since 1997 the overall amount of investment has declined, with the exception of 2000, when as much as 959m soms was invested in JSC Reemstma-Kyrgyzstan alone. In 2001, the republics Investment Credit Bank accounted for the larger part of foreign direct investment (around 339m soms). In 2002, investments went to OJSC Kant Cement Slate Works (302.2m soms) and OJSC Maili-Suu Electric Bulb Plant (167.9m soms).

At the same time, as noted above, the average annual amount of domestic and foreign investment has tended to decline. An analysis of the average annual values of the Stock Exchange index shows that it fell from 197.5% in 1997 to 59.6% in 2002 (see Fig. 4).

Fig. 4. Kyrgyz Stock Exchange Index (%)

In the first four months of 2003, the average monthly Stock Exchange index was 60.3%. Its fall is primarily a reflection of the decline in the total market value of the shares of companies listed on the Stock Exchange. Overall, 21 of the republics most efficiently operating joint stock companies are now listed on the Exchange. Since these companies represent all branches of the countrys economy, the Stock Exchange index reflects the situation in the entire corporate sector.

Another major problem is the lack of purposeful support for the development of the market infrastructure, primarily such institutions as the Stock Exchange and the Central Depository. As we noted above, the Stock Exchanges technical and organizational readiness to handle not only corporate, but also government securities remains unclaimed.

At the same time, problems of legislation covering the securities market are being gradually resolved through the joint efforts of government agencies and professional market participants. For example, a more progressive Law on Joint Stock Companies was recently adopted, and a very advanced bill On the Securities Market, drawn up with the help of professional participants in this market, has passed its first reading in parliament. Nevertheless, the question of preparation and adoption of acts designed to promote the effective development of the securities market is still high on the order of the day.

In my view, the first thing to do is to elaborate and adopt a law on the specific features of issuance of government and municipal securities. The governments current attempts in this area can satisfy the market only as temporary, pilot measures. A law regulating the issuance of government securities will help not only to streamline this procedure, but also to overcome the departmental barriers and lack of understanding that are still in evidence among some government agencies.

The second thing that has to be done in this area is to enact legislation laying down the mechanism for the issue, circulation and payment of commercial bills. In 2003, Kyrgyzstan acceded to the International Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes, but no legislative or regulatory acts governing the operation of this segment of the market have yet been adopted in the republic. This calls for joint efforts on the part of ministries, departments and professional participants in this market.

The third key requirement for the development of legislation and of the market itself is proper support by the government for a gradual transfer of the trade in government securities to the Stock Exchange. We are badly in need of pilot issues of government securities that could be freely traded on the Exchange. We are also in need of assistance in organizing exchange trade in government treasury bills.

One of the priorities of state policy in the field of the economy is unconditional implementation of measures to develop the securities market that would provide the key both to further privatization and to the success of investment activities. But some government officials at the very top have yet to understand the simple truth that there can be no foreign investments without domestic investments and that the most favorable environment for foreign investments is a successfully operating market of internal household savings and deposits coupled with investment activities by national investment and pension foundations, insurance companies and other institutional investors. Bona fide foreign investors usually invest their funds in a market only when they have satisfied themselves that, judging by the activities of domestic investors, the investment climate in the country is favorable. That is why the main priority in developing the securities market is to create an environment favorable to business in general and to capital investments in particular. On the one hand, this implies the need to create conditions for the operation of domestic investors, i.e., to enact progressive legislation on a contributory pension system, to introduce effective types of mandatory insurance and to exempt from tax household and business investments. On the other hand, we have to make the country more attractive to foreign investors through a normally functioning state system of economic administration (with corruption reduced to a minimum), a stable and progressive tax system, legislative protection of foreign investments, and an effectively operating financial and stock market infrastructure.

How can these priorities be implemented? There is no simple answer to this question. But one thing is quite clear: this can (and must) be done by raising these priorities to the rank of a national program, which would provide the necessary guidance for all participants in this process. Such a program should have nothing in common either with the Comprehensive Program being prepared by the State Commission on the Securities Market as an essentially departmental document or with the Investment Matrix, which is a conventional package of measures not backed by financial resources or implementation mechanisms. Such a program must rely on the human, financial, technical and managerial resources that are now at the disposal of the country, including assistance in the form of grants from donor organizations. We must all put our heads together to develop such a program. The Kyrgyz Stock Exchange has already made its proposals (to hold a national conference and then to sum up the views and proposals of all its participants), setting these forth in an initiative letter to the government. We hope that our initiative will be supported and that the development of the securities market in Kyrgyzstan will become one of the priorities of the states economic policy.

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