Kyrgyzstan eyes investment rush

The new year will prove crucial for Kyrgyzstan’s development as an investment destination. Its leadership have high hopes, not least President Sadyr Japarov, who recently signed a landmark decree on “measures for the further development of the stock market and exchange activities”.

The problem facing the landlocked Central Asian country of seven million is obvious. According to the text of the decree itself - “In the Kyrgyz Republic, the stock market is still underdeveloped and there are no government and private financial instruments that are attractive to investors.” That is quite the admission, yet a necessary one if Kyrgyzstan is to meaningfully develop its financial sector.

Since the fall of the Soviet Union, the country’s economy has been heavily reliant on remittances from migrant workers, with minerals and agricultural products making up the bulk of its exports. Today, it ranks among the poorest in the region, with the more populous and resourse rich Kazakhstan and Uzbekistan substantially ahead in their economic development. Efforts to diversify and modernise the Kyrgyz economy are therefore essential. Kyrgyzstan’s aspiration of becoming a regionally important financial hub is one to watch, especially if the reforms outlined in the aforementioned decree are successfully implemented.

Two things need to happen for Kyrgyzstan’s stock market to develop in line with its government’s aspirations. The first is the creation of palpable new investment opportunities for foreign funds as well as domestic retail investors. The second is the establishment of the proper infrastructure to facilitate said investment.

With regards to the former, a 2nd wave of privatisation (the first having occurred soon after the end of Soviet power) is expected to see a number of state owned enterprises go public on the local stock market. Among the most notable are MegaCom, the leading telecommunications company in Kyrgyzstan, KyrgyzAltyn, The national holding company for gold mining projects, and Bishkek’s Manas International Airport.

In terms of building infrastructure, a potentially game-changing move is the intention to introduce ‘personal investment accounts’, allowing tax-free investment for locals. The initiative is modelled on a similar policy which helped initiate a retail investment rush in Russia back in 2019.

Further, the Kyrgyz government intends to utilize the country’s post office network in facilitating stock market investments by residents, another potentially critical move given the lack of traditional banking and brokerage services throughout much of Kyrgyzstan. These measures have the potential to dramatically boost the liquidity of the local stock market.

I reached out to Interstan Securities, Kyrgyzstan’s oldest investment and brokerage house, for a comment on the recent presidential decree. A representative of the firm replied:

“These measures are long overdue. Introduction of new tradable instruments to the stock exchange and the somewhat forced privatization of minority stakes in the flagship government-owned companies should make the regulated markets of Kyrgyzstan a space to watch for foreign funds, besides local private investors and institutionals.

Since the first wave of privatization ended over 20 years ago, the organized stock market of the country has been mainly stagnant. We at Interstan spared no effort to convince the decision-makers in several consecutive governments that foreign institutional capital is the source to go for, to finance the country’s development and revitalize the local stock market. Finally, the industry is getting a long overdue boost from the regulators.”

Kyrgyzstan already holds significant potential with regards to its financial services industry. Occasional political instability has done remarkably little to alter its open approach to business. The county maintains a very favorable regulatory framework, with low taxes and no exchange controls. It holds aspirations of becoming a regional leader in Islamic finance, with infrastructure in place for the issuance of Islamic securities (sukuk). Whether this potential can be realized now depends upon the measures outlined above.