SECURITY MARKET IN AZERBAIJAN:

recent developments, challenges and policy solutions

Asif Kasumov

Content

➢Azerbaijan at a glance

➢ Security market overview

➢Corporate securities, Repo operations and Derivatives

➢Government security market

➢Conclusion and policy reactions

Azerbaijan at a glance

Azerbaijan at a glance

11.1%9.9% 9.4% 10.2% 9.3%

28.0%

34.5%

25.5%

10.6%9.4%

4.8%

-1.6%

2.2%

5.8%

2.8%1.1%

-3.1%

-0.3%

1.4%

0%

5%

10%

15%

20%

25%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

GDP growth rate and inflation rate, annual

GDP growth rate Inflation rate, right axis

Source: Statistics of Azerbaijan

Azerbaijan at a glance

0.5

4.24.7

3.2

9.4

1.3

4.0

1.0 0.8

7.1

1.6

GDP per capita, thousand current USD

Source: IMF

Security market

Sovereign Credit Ratings

S&P Moody's Fitch

Armenia Ba3 B+

Azerbaijan BB+ Ba2 BB+

Kazakhstan BBB- Baa3 BBB

Kyrgyzstan B2

Mongolia B B3 B

Tajikistan B- B3

Turkmenistan CCC-

Uzbekistan BB- B1 BB-

Azerbaijan at a glance

0.5%

0.7%

0.5%

0.2%0.2%

0.3%

0.9%

1.4%

1.0%

0.5%

0.7%

0.5%0.6%

0.3%0.4%

0.2%

0.6%

2.4%2.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Outstanding government securities, % of GDP

Security market overview

Security market

Regulatory framework and infrastructure

Financial Markets

Regulatory Authority -

FIMSA

Banking sector

Capital markets

Insurance sector

FIMSA – Legal Entity of Public Law, established in 2016

Baku Stock

Exchange

National depositary

center

Security market

* Source: Financial Market Supervisory Authority (FIMSA)

Security transactions (2018)

9%

54%

34%

2%

Volume of security market and its structure

Corporate securities Government securities

Derivatives Repo operations

14,4 bn. $

59%

41%

Primary and secondary market

Primary market Secondary market

Security market

Securities in circulation (10.2019)

28%

72%

Sovereign and quasi-government fixed income securities of Azerbaijan

AZN (MF bonds and CBAR notes) USD (Eurobonds)

8%

92%

Corporate fixed-income securities of Azerbaijan

AZN USD

6,7 bn. $4,1 bn. $

Corporate securities, Repo operations and Derivatives

Corporate Security Market

* Source: FIMSA

Corporate Security transactions (2018)

42%

58%

Volume of corporate security market and its structure

Stocks Corporate bonds

1,29 bn. $

60%

40%

Primary and secondary market

Primary market Secondary market

Corporate Security Market – Mortgage bonds

Mortgage bonds in circulationTurnover (mln.AZn) Profitability

Corporate bonds

Main parameters of mortgage bonds

Issuer: Azerbaijan Mortgage Fund

Duration: from 7 to 23 years

Issue form: coupon bonds

Coupon payment: semi-annual

Nominal value: 1000 manat (588 USD)

Placement method: through direct auctions (announcement of the price)

Security market

* Source: FIMSA

Repo transactions and derivatives (2018)

12.3%

87.7%

Volume of derivatives market and its structure

Commodity based Currency based

4,95 bn. $

4.5%

66.1%

29.4%

Volume of repo operations and its structure

Repo with corporate bonds Repo with government bonds

Repo with CBAR notes

0,36 bn. $

Government security market

Security market

* Source: FIMSA

Government Security Transactions (2018)

8%

92%

Volume of government security market and its structure

Government Bonds CBAR` notes

7,85 bn. $

98%

2%

Primary and secondary market

Primary market Secondary market

Security market

Government (MoF) bonds in circulation (10.2019)

26.5% (191 mln.$)

42.9% (309 mln.$)

30.6% (220 mln.$)

1Y bonds

2Y bonds

3Y bonds

Security market

Government bonds in circulation, mln. $ (10.2019)

0

2

4

6

8

10

12

14

16

18

20

0

100

200

300

400

500

600

700

800

01

.01

.20

17

01

.02

.20

17

01

.03

.20

17

01

.04

.20

17

01

.05

.20

17

01

.06

.20

17

01

.07

.20

17

01

.08

.20

17

01

.09

.20

17

01

.10

.20

17

01

.11

.20

17

01

.12

.20

17

01

.01

.20

18

01

.02

.20

18

01

.03

.20

18

01

.04

.20

18

01

.05

.20

18

01

.06

.20

18

01

.07

.20

18

01

.08

.20

18

01

.09

.20

18

01

.10

.20

18

01

.11

.20

18

01

.12

.20

18

01

.01

.20

19

01

.02

.20

19

01

.03

.20

19

01

.04

.20

19

01

.05

.20

19

01

.06

.20

19

01

.07

.20

19

01

.08

.20

19

01

.09

.20

19

01

.10

.20

19

Government bonds outstanding 1Y rate (%) 2Y rate (%) 3Y rate (%)

Security market

Outstanding sterilization tools by Central Bank

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

200

400

600

800

1,000

1,200

1/9

/20

17

2/9

/20

17

3/9

/20

17

4/9

/20

17

5/9

/20

17

6/9

/20

17

7/9

/20

17

8/9

/20

17

9/9

/20

17

10

/9/2

01

7

11

/9/2

01

7

12

/9/2

01

7

1/9

/20

18

2/9

/20

18

3/9

/20

18

4/9

/20

18

5/9

/20

18

6/9

/20

18

7/9

/20

18

8/9

/20

18

9/9

/20

18

10

/9/2

01

8

11

/9/2

01

8

12

/9/2

01

8

1/9

/20

19

2/9

/20

19

3/9

/20

19

4/9

/20

19

5/9

/20

19

6/9

/20

19

7/9

/20

19

8/9

/20

19

9/9

/20

19

10

/9/2

01

9

Deposit outstanding (mln. $) Notes outstanding (mln. $) Deposit Ave. yield (%) Notes ave. yield (%)

Security market

Yield Curve (10.2019)

6.26%6.03% 6.06% 6.14%

6.35%

7.11%

8.42%

Note (28d) Note (84d) Note (168d) Note (252d) Bond (1y) Bond (2y) Bond (3y)

* Source: Baku Stock Exchange

Conclusion and policy reactions

➢ Main existing problems:

▪ Government and corporate securities market is shallow and still developing

▪ Maturity of Government securities is short and not enough for the formation of yield curve

▪ Institutional investors don’t exist in the market

▪ Access of foreign investors to local currency bond market is limited

▪ Secondary market is not well developed, so that securities are not liquid enough

Conclusion and policy reactions

➢ Key policies to address the current problems:

▪ Strategic Roadmap on Developing Financial Markets and Services was adopted

▪ Transformation of government`s foreign debt into local debt is underway (increasing volume and maturity of Government Bonds)

▪ Creating link with international capital markets (joining to Clearstream)

▪ Developing financial infrastructure (incl. integration to Bloomberg platform)

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