“THE PEOPLE’S IPO” BUILDS ON KAZAKH STABILITY
Kazakhstan’s President, Nursultan Narzarbayev, has set elections for April 3, 2011. As part of his reelection program, a clear plan for a “People’s IPO” was announced at the World Economic Forum in Davos last month. The initial public offering will sell shares on the Kazakh Stock Exchange (KSE) from holdings of the “Samruk-Kazyna” Sovereign Wealth Fund. The IPO’s objectives are to boost the KSE’s institutional capacity amid a growing wave of global stock market mergers and increase economic participation by Kazakh citizens. While Arab leaders redistribute sovereign wealth funds to quell unrest, Narzarbayev’s strong political position drives forward-looking economic development policies.BACKGROUND: President Narzarbayev’s surprise call for elections has successfully caught opposition candidates off guard. Although he is virtually assured of victory, his campaign has rolled out an economic development program to convince voters to extend his twenty-year rule. Given the accelerated election timeline, his platform focuses on financial policies which can be implemented in the near term. A “People’s IPO” will be launched to allow ordinary Kazakh citizens to buy shares in state-owned and sovereign-wealth-controlled firms. The election pledge is well designed to appeal to broad voting constituencies.
Kazakh households have been effectively excluded from equity investing because of cumbersome regulations and weak institutional capacity at the KSE. The average trading volume is low; in January the entire exchange posted about US$ 60 million in transactions. In comparison, Coca-Cola’s shares trade that same amount in 45 minutes on a typical day at the NYSE. In spite of an advanced technical trading platform, the KSE imposes onerous rules and capital requirements on investors. Low volume and bureaucracy work in tandem as a barrier to individual retail investing.
Large Kazakh firms have chosen to list on the London Stock Exchange (LSE) to access international capital markets. KazMunaiGaz, Eurasian Natural Resources Corporation, and Kazakhmys are dual-listed in London and Almaty, though the vast majority of share volume is transacted on the LSE. The KSE and LSE signed a cooperation agreement in 2006, but it is limited to the regular exchange of general information and a shared marketing vision. No formal arrangement exists to share quotes or other transaction details; the two stock markets are financially disjointed.
Two funds represent the Kazakh national endowment of wealth. The “Samruk-Kazyna” Sovereign Wealth Fund is organized as a joint stock company to manage large state-owned enterprises. The fund is mostly an economic development vehicle for organizations such as Kazatomprom, Kazpost, and Kazakhstan Temir Zholy (rail company). Because these holdings are not publically traded, their imputed worth of around US$ 70 billion is difficult to truly value, but the fund is rated investment grade by Standard & Poor’s. Distinct from Samruk-Kazyna, the National Oil Fund (NOF) holds US$ 33.5 billion in wealth from the sale of oil and gas. During the global financial crisis, the NOF was tapped as a capital stabilization pool. Both funds have different purposes and economic objectives.
IMPLICATIONS: The “People’s IPO” is unlikely to be a definitive factor in President Narzarbayev’s impending victory; however, it should have long term economic effects. Individual investors will be enfranchised; the KSE will be strengthened; the domestic investment capital base will be expanded; Kazakh markets will be more globally competitive. The proposed program offers a broad array of policies to promote economic stability and development.
The IPO rules are fairly restrictive: Only Kazakh citizens will have the right to purchase up to 50 shares in each newly privatized firm. The IPO is not a wealth redistribution mechanism, but the implied goal is to create long-term prosperity through expanded stock market participation. The IPO will include educational materials on financial literacy, and individuals will have a greater choice of investment alternatives. Nevertheless, significant implementation challenges remain.
The KSE will have to change its regulations to welcome the new investors. Simplified investment rules and open access to exchange information are being developed. As more people purchase shares, market capitalization and liquidity will increase, and the price-setting mechanism of the market should be more robust. The first IPO will be KazMunaiGas followed by other LSE-listed firms. Because these companies are already profitable, they ought to be more reliable investments. Later, less competitive enterprises like KazPost and Kazakhstan Temir Zholy will float offerings, and IPO demand may wane.
To manage less competitive firms, Samruk-Kazyna relies on a mix of foreign investment and NOF stabilization capital. In February, the China Development Bank loaned Samruk-Kazyna US$ 1.7 billion, part of a pattern of Chinese state investment in Kazakhstan. The IPO’s could reduce the need for foreign money by expanding domestic private investment. A more diversified domestic shareholder base should also reduce volatility and partly supplant NOF financial support.
Regionally, the KSE is the strongest exchange. The Uzbek stock market is mired in currency convertibility issues; Tajikistan’s market is nonfunctional, and Turkmenistan has no exchange at all. The KSE is a partial owner in the Kyrgyz Stock Exchange, but Kyrgyz market capitalization remains miniscule at under US$ 200 million. In order to expand, the KSE will have to look outside the region, and this implies adjusting to global standards.
Global competition for financial services is increasing. A number of proposed stock market mergers may create significant economies of scale and link major financial hubs like never before. Kazakhstan aims to be a leading Asian financial center, but additional reforms are necessary to increase transparency and liquidity. Alignment with international clearing standards must also be implemented to synchronize the flow of funds. Mechanisms to better equilibrate dual-listed share prices must also be installed to reflect true market capitalizations and ensure fair trades.
CONCLUSIONS: The People’s IPO is a modest economic development program. Selected state-owned firms will spin off from five to twenty percent of their total shares. The plan’s scope stands in stark contrast to recent sovereign wealth transfers in the Arab world. Saudi Arabia distributed almost US$ 40 billion in social aid in February, and smaller Gulf States upped domestic spending by proportional amounts. Narzarbayev’s measured and limited approach speaks to his confidence as Kazakh leader.
Kazakhstan has the ability to implement the IPO domestically. If the process is managed fairly, then greater economic participation will be achieved easily. The true touchstone for success will come from external factors. KSE share values will have to correspond roughly to LSE dual-listings to prove the market is working efficiently. With regional stock exchange opportunities lacking, the KSE will need to harmonize its regulations and increase capitalization and liquidity to complete globally. Simply remaining the leading regional exchange will not be sufficient for long term success.
AUTHOR’S BIO: Tony Pizur is an independent researcher based in New York. He has a Master’s Degree from Brown University and a PhD in economics from the International University of Kyrgyzstan.
Kazakh households have been effectively excluded from equity investing because of cumbersome regulations and weak institutional capacity at the KSE. The average trading volume is low; in January the entire exchange posted about US$ 60 million in transactions. In comparison, Coca-Cola’s shares trade that same amount in 45 minutes on a typical day at the NYSE. In spite of an advanced technical trading platform, the KSE imposes onerous rules and capital requirements on investors. Low volume and bureaucracy work in tandem as a barrier to individual retail investing.
Large Kazakh firms have chosen to list on the London Stock Exchange (LSE) to access international capital markets. KazMunaiGaz, Eurasian Natural Resources Corporation, and Kazakhmys are dual-listed in London and Almaty, though the vast majority of share volume is transacted on the LSE. The KSE and LSE signed a cooperation agreement in 2006, but it is limited to the regular exchange of general information and a shared marketing vision. No formal arrangement exists to share quotes or other transaction details; the two stock markets are financially disjointed.
Two funds represent the Kazakh national endowment of wealth. The “Samruk-Kazyna” Sovereign Wealth Fund is organized as a joint stock company to manage large state-owned enterprises. The fund is mostly an economic development vehicle for organizations such as Kazatomprom, Kazpost, and Kazakhstan Temir Zholy (rail company). Because these holdings are not publically traded, their imputed worth of around US$ 70 billion is difficult to truly value, but the fund is rated investment grade by Standard & Poor’s. Distinct from Samruk-Kazyna, the National Oil Fund (NOF) holds US$ 33.5 billion in wealth from the sale of oil and gas. During the global financial crisis, the NOF was tapped as a capital stabilization pool. Both funds have different purposes and economic objectives.
IMPLICATIONS: The “People’s IPO” is unlikely to be a definitive factor in President Narzarbayev’s impending victory; however, it should have long term economic effects. Individual investors will be enfranchised; the KSE will be strengthened; the domestic investment capital base will be expanded; Kazakh markets will be more globally competitive. The proposed program offers a broad array of policies to promote economic stability and development.
The IPO rules are fairly restrictive: Only Kazakh citizens will have the right to purchase up to 50 shares in each newly privatized firm. The IPO is not a wealth redistribution mechanism, but the implied goal is to create long-term prosperity through expanded stock market participation. The IPO will include educational materials on financial literacy, and individuals will have a greater choice of investment alternatives. Nevertheless, significant implementation challenges remain.
The KSE will have to change its regulations to welcome the new investors. Simplified investment rules and open access to exchange information are being developed. As more people purchase shares, market capitalization and liquidity will increase, and the price-setting mechanism of the market should be more robust. The first IPO will be KazMunaiGas followed by other LSE-listed firms. Because these companies are already profitable, they ought to be more reliable investments. Later, less competitive enterprises like KazPost and Kazakhstan Temir Zholy will float offerings, and IPO demand may wane.
To manage less competitive firms, Samruk-Kazyna relies on a mix of foreign investment and NOF stabilization capital. In February, the China Development Bank loaned Samruk-Kazyna US$ 1.7 billion, part of a pattern of Chinese state investment in Kazakhstan. The IPO’s could reduce the need for foreign money by expanding domestic private investment. A more diversified domestic shareholder base should also reduce volatility and partly supplant NOF financial support.
Regionally, the KSE is the strongest exchange. The Uzbek stock market is mired in currency convertibility issues; Tajikistan’s market is nonfunctional, and Turkmenistan has no exchange at all. The KSE is a partial owner in the Kyrgyz Stock Exchange, but Kyrgyz market capitalization remains miniscule at under US$ 200 million. In order to expand, the KSE will have to look outside the region, and this implies adjusting to global standards.
Global competition for financial services is increasing. A number of proposed stock market mergers may create significant economies of scale and link major financial hubs like never before. Kazakhstan aims to be a leading Asian financial center, but additional reforms are necessary to increase transparency and liquidity. Alignment with international clearing standards must also be implemented to synchronize the flow of funds. Mechanisms to better equilibrate dual-listed share prices must also be installed to reflect true market capitalizations and ensure fair trades.
CONCLUSIONS: The People’s IPO is a modest economic development program. Selected state-owned firms will spin off from five to twenty percent of their total shares. The plan’s scope stands in stark contrast to recent sovereign wealth transfers in the Arab world. Saudi Arabia distributed almost US$ 40 billion in social aid in February, and smaller Gulf States upped domestic spending by proportional amounts. Narzarbayev’s measured and limited approach speaks to his confidence as Kazakh leader.
Kazakhstan has the ability to implement the IPO domestically. If the process is managed fairly, then greater economic participation will be achieved easily. The true touchstone for success will come from external factors. KSE share values will have to correspond roughly to LSE dual-listings to prove the market is working efficiently. With regional stock exchange opportunities lacking, the KSE will need to harmonize its regulations and increase capitalization and liquidity to complete globally. Simply remaining the leading regional exchange will not be sufficient for long term success.
AUTHOR’S BIO: Tony Pizur is an independent researcher based in New York. He has a Master’s Degree from Brown University and a PhD in economics from the International University of Kyrgyzstan.
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