Government Securities Market of Kazakhstan

1. The importance of the research
The global practice shows, that the security markets are the effective mechanism of mobilization of financial resources and savings of the population, optimum redistribution of means in a national economy.

However, today, the economy of Kazakhstan is facing the problem of having more money in circulation than it is required. Moreover, most of this money is not earning, but rather kept in people’s hands. This paper is aimed at analyzing one of the tools to solve this problem – government securities. It will consider the past and the present situation of the market for government securities. Also, it will consider the ways to improve and enlarge the market for further development of national economy as a whole.

One of the important tools of the security market is government security. All over the world governments and their establishments are the largest borrowers of the capital. With the help of the markets of government securities, the state borrows temporarily free money resources from commercial banks, financial companies and population. The received money resources are used for non-inflationary financing of government and local budget deficits. Besides, the given sector of the security markets is especially important for a national economy as the tool of monetary policy, as a key parameter of a status of a financial system of the state, and also as a guide for the foreign investors.

2. Government Securities
The types of government securities circulating since 2000
1. MEAKAM – government special bonds of Ministry of Finance of the Republic of Kazakhstan with 10 years of maturity
2. MEIKAM – government treasury bonds of Ministry of Finance of the Republic of Kazakhstan indexed to inflation
3. MEKABM – government currency treasury bonds of Ministry of Finance of the Republic of Kazakhstan indexed to inflation
4. MEKAM – government treasury bonds of Ministry of Finance of the Republic of Kazakhstan with all types of maturity
5. MEKKAM – government short-term treasury bonds of Ministry of Finance of the Republic of Kazakhstan with up to 1-year maturity included
6. MEOKAM – government middle-term treasury bonds of Ministry of Finance of the Republic of Kazakhstan with from 1-year to 10-year maturities.

3. Development of GS in primary and secondary markets
In 1994 creation of a home security market begun in Kazakhstan, which would be capable to carry out the above-stated functions considerably to reduce volumes of direct crediting by National Bank of the Ministry of Finance. The market of government securities was formed gradually.
? First, the volumes addressed on the security market were increased. It concerns both the primary, and the secondary government securities market.

Figure # 1

On results of 2000, the volume of the issued government securities has made already 200099 million tenge, and volume of the trades in the secondary market – 524360 million tenge. Whereas in 1994 the given parameters did not exceed 233, 7 million and 1, 7 million tenge, accordingly.
? Second, a variety of tools of borrowing grew. If right at the beginning of formation of government securities markets, state offered the three-monthly exchequer obligations and notes of National Bank only in tenge, by the end of 2000 the spectrum of financial tools considerably has extended. It is important to note occurrence in Kazakhstan in 1999 of a new category of government securities – bonds of local executive bodies.

The data is kindly provided by the State Statistics Agency
? Third, in process of development of the market of the state liabilities its infrastructure developed also: technical and legal.

4. The technical infrastructure.
The basic components of the technical infrastructure, generated in Kazakhstan, of the security markets are a National commission of Republic of Kazakhstan on securities, Ministry of the finance acting by the emitter of government securities on behalf of government; national bank which is carrying out functions of the financial agent on service of release; CJSC ” Central deposits of securities”, carrying out account of movement of the property rights on securities; the Kazakhstan stock exchange acting by the organizer of secondary tenders on republican securities and primary accommodation on the bonds of local bodies of authority, and also primary dealers.

5. The legal base
The legal base of functioning of the security markets is submitted by a package of the documents regulating to all spectrum of the legal relations of the participants, order of accommodation of government securities, repayment, secondary tenders and realization of accounts. Among the basic normative acts it is possible to name the:
• Civil code of Republic of Kazakhstan,
• Law of Republic of Kazakhstan ” On the security markets “,
• Law of Republic of Kazakhstan ” On state and guaranteed state borrowings and duty”,
• Rules on the order of release, manipulation and repayment of various kinds of government securities, and also
• “Rules of realization of operations REPO and opposite REPO and government securities of the Republic of Kazakhstan

6. Development of external borrowing of the Ministry of Finance
Already it is possible to tell, that the home market of state securities is generated and corresponds to a modern level of development of national economy. Besides for today it is the most advanced and large part of all financial markets of Kazakhstan. Analyzing the market of the state liabilities, it is necessary to mention a question on development of external borrowings of the Ministry of the Finance, which is carried out with the help of emission of euro securities.
The preferability of the euro-bonded loans is explained to that only in euro markets it is possible to attract long-term and rather cheap financial resources. The release of external borrowings on a market basis directly and indirectly reduces cost of the debt. Direct effect – attraction of additional sources of financing of deficiency of the budget. Indirect effect – decrease of profitability of all tools of the state debt and strengthening of a position of the Ministry of Finance at accommodation of new releases in a home market. At the same time, except for the economy of the internal savings, successful accommodation of the external loans gives a positive signal for direct and indirect portfolio of the investments.
The question on development of the given direction of state borrowings has risen in 1996, as by then home market of government securities yet did not give an opportunity to attract means for longer terms.
In total for years of independence Kazakhstan made four releases of sovereign euro-bonds, which have allowed to occupy the niche in the international capital market.
Date of issue 20.12.1996 02.10.1997 18.10.1998 11.05.2000
Maturity date 20.12.1999 02.10.2002 18.10.2004 11.05.2007
Coupon rate 9.25 8.375 13.625 11.125
Number of pmt p.a. 2 2 2 2
Currency $ $ $ $
Initial spread 350 245 825 500
Total value $200 mln. $350 mln. $275 mln. $350 mln.
Exchange listing Amsterdam
Luxemburg Amsterdam
Luxemburg
Luxemburg Amsterdam
Luxemburg
Managers ABN AMRO Bank J.P. Morgan
Deutsche Bank Deutsche Bank
ABN AMRO J.P. Morgan

The data is kindly provided by the State Statistics Agency
In whole all four issues were appreciated by the experts as successful, despite of the negative corrective amendments, which have been brought in a situation by global financial crisis.
Certainly creation for rather short time of the satisfactorily functioning market of government securities is plus for a national economy. Nevertheless given market has the contradiction, which should be eliminated by its further improvement. Firstly, this market concentrates the most part of all free market resources, distracting them thus from investment funds in real sector of economy. On this control will be kept to ensure that the issue of government securities remained in borders not undermining investment prospects. Secondly, the constant escalating of release of government bonds results in increase of the charges of the state on service of the debt, and as it breaks a parity of flows of financial resources between the state and enterprises.
The contradiction of functioning of the market of government securities can be overcome by the further perfection of its segments of the financial market.
7. The basic direction of the further development of GS market.
The basic directions of the further development of a home market of government securities in our point of view become:
– Decrease of profitability of government securities;
– Re-structuring of the internal debt for the benefit of more long-term borrowings;
– Expansion of a number of the holders of government securities;
– Development of sector of government securities of local bodies of management (municipal securities)
The basic condition of development of the financial market is the decrease in profitability of government securities. And as high profitability conducts not only to increase of cost of service of the state debt but also raises a general price level on extra resources. Now many commercial banks consider the market of government securities as most reliable and sufficiently profitable object of an investment of free financial resources. For this reason in the arsenal they in most cases have 2 basic sources of the incomes – contributions to tools of the market of government securities and commission for granting of services. All this considerably complicates a situation with investment in real sector of economy.
It is necessary to note, that during development nevertheless it was possible considerably to lower the profitability of government securities, at the expense of activization in the market of pension funds, the given tendency will be possible to be kept. However, to reach an optimum level of profitability appropriate to real opportunities of economic system, for today yet it was not possible.
One of the measures on reduction of cost of service of the state debt is its re-structuring for the benefit of more long-term borrowings. The Ministry of Finance takes steps on prolongation of terms of the loans. Nevertheless now as before in structure of the market of government securities short-term tools borrow the most part.
Besides cost of service of the state debt needs to be reduced, having increased number of the investors wishing to participate in crediting the state. For today it is important to attract to the market the population and not the residents. As to the population that today, it practically does not participate in the market of government bonds. In Kazakhstan as before, the basic share of government primary dealers at their own expense purchase securities. Earlier, till April, 1999, Ministry of Finance of the Republic of Kazakhstan the national savings bonds were issued and were intended for accommodation, including the physical persons, but in connection with transition to a mode of the freely floating exchange rate of tenge, now data valuable securities have appeared practically dead. Therefore, for attraction of the savings of the population it is necessary to use new liquid tools, which can be returned to the emitter at any time or on the expiration of the certain term of maturity. Thus, the important role is played by the price of the state bonds, which should be minimal. That is, accessible to the majority of the citizens.
Besides attraction of the savings of the population considerably to increase opportunities of the investment mechanism, the participation of non-residents in the market of securities should be allowed. The first step in a direction of the decision of the given task already is made – the decision on the admission of non-residents in a home market of government securities is accepted.
Prospect of participation of the foreign investors in the market of government securities directly depends on skills to overcome the crisis of trust on the part of western investors who are still very badly familiar with conditions and features of domestic market, so that they would be involved in the large scales in the operations with tools, new to them.

9. Summary
It is necessary to mention a question on prospects of borrowing in an international capital market. The prospects Kazakhstan euro bonded releases will be dependent on the state approach to regulation of the external loans and on the tendencies of development of the global markets after recent crisis. Relative profitability euro bonds in relation to internal government securities will be dependent on comparative dynamics of their profitability and on rates of a gain of foreign currencies.
As a whole, the formation of the advanced and steady market of the state liabilities in the long term will be dependent on a general economic situation in the country. It is necessary to the state to create all conditions for development of stimulus to the savings to be accumulated and transform them into the investment.
Reference:
1. Kazakhstan Stock Exchange, Annual Report 2001
2. Security Markets, Magazine, December 2001
3. State Statistics Agency, Report on movement of securities for 2001
4. Zh. N. Aytjanova, G. M. Adilova: “The Role of securities in Stock companies”, Study manual, 1997
5. Kazkhstan Sector Research, Kazakhstan Financial Markets, Government securities, May 1998.
6. Aljanova A. “Municipal bonds as alternative source of financing in capital markets”, 1998
7. Nurdin D. “Euro – obligations in Kazakhstan: Theory and Practice”, 1997
8. Berzon N.I., Bulkova E. A., Kojevnikov N. A., Chalenko A. V.: “Stock Exchange”, 1998

1. Introduction
2. The types of government securities
3. Development of GS in primary and secondary markets
4. The technical infrastructure
5. The legal base
6. Development of external borrowing of the Ministry of Finance
7. The basic direction of the further development of GS market
8. Summary

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