|
The fund’s portfolio companies largely continue to execute, but whose share prices are struggling due to the nascent capital markets ecosystem, which again we foresaw when we first started investing here, saying the thesis could take five to seven years to play out as the country opened and liberalised and is now building capacity to better understand how to grow the economy sustainably. Regarding the capital markets, below is an update on specific developments that should in due course lead to greater investor participation and thus enhanced liquidity and the long overdue share price re-rating.
A near-term catalyst? Individual Investment Accounts
As a refresher we discussed in the May 2024 newsletter that the government was working to implement Individual Investment Accounts (IIAs) which will allow Uzbek residents and citizens, age 18 and older to open an IIA designated brokerage account with the ability to allocate up to 100x the minimum wage (UZS 105 million), or ~USD 8,300 of salaried income that would otherwise be taxable at 12%.
On 13th June 2024, the resolution of the Cabinet of Ministers approved the introduction of IIAs and the Tashkent Stock Exchange and stock brokers are now in the process of updating their internal processes to officially launch these accounts, which we anticipate to begin in the third quarter and pick up pace thereafter.
It remains to be seen if the government will promote this scheme or if brokers and companies will bear this responsibility. Regardless, if introduced correctly, this scheme could lead to a step-change in the capital markets. While the government might be wary of the scheme reducing tax receipts, encouraging development of the capital markets would in due course lead to growing businesses and eventually new employment.
Two live examples of what we are aware of so far regarding this scheme that will help to kickstart the IIA program:
Firstly, we are aware of a leading private sector financial institution looking to issue a corporate bond to its employees and clients with a coupon in the high teens. Why would this be attractive to both parties? Well, retail investors would be getting a double-digit interest rate on their capital they would otherwise pay to the tax man, and the company is able to borrow at a roughly 30% discount to what they would be able to borrow at if they issued a corporate bond outside of this scheme, based on current market dynamics and interest rates.
Secondly, a private sector multinational financial institution with over two-million Uzbek clients is developing the internal infrastructure and partnerships with stock brokers to open IIAs, with plans to launch this offering later this year.
So, the big question is what does all this mean, and what’s the theoretical potential of the IIA scheme on the capital markets? Well, using the second piece of news from above, a push by a private sector company with a large client base could be “the game changer”.
According to stat.uz, the home of Uzbek government statistics, the average monthly salary in the country increased 17.4% YoY in the second quarter to UZS 5.09 million (~USD 405). In Tashkent, the average wage has risen to UZS 8.45 million (~USD 673). Thus, if the company in the second example above, with over 2 million customers, is able open IIAs for just 2.5% of its client base, this translates into 50,000 new brokerage accounts. While this may not sound significant, one needs to consider that today, there are only ~40,000 brokerage accounts in existence in Uzbekistan, of which only 10,000 to 15,000 are regarded as being active by the Tashkent Stock Exchange. The addressable investor market would increase dramatically.
Of course, we aren’t talking about huge sums of capital on an individual basis with an average salary of only ~USD 405, but the law of large numbers can do beautiful things. If 50,000 IIAs are opened and accounting for the 12% tax paid by the average earner in Uzbekistan (not Tashkent), this equates to ~USD 48.60 per month. Multiply by 50,000 and that’s USD 2.43 million PER MONTH of new capital that can go into Uzbekistan’s debt and equity markets. Annualised, this is ~USD 29.16 million, a truly substantial sum of capital for such a nascent market that would be consequential for its development.
Tired of writing this ourselves, our thesis for Uzbekistan’s capital market development since day one has been first and foremost, seeing that it becomes easier for local and foreign investors to gain exposure to the market as the onramp to account opening is made seamless (digital account openings will facilitate this). With foreign capital via the new custodian in the capital markets “sandbox”, Bank of Georgia, easing bureaucracy for foreigners to increase their investments, building a large domestic retail market has been paramount; we appear to be on the cusp of this which is several painful years of waiting in the making. Once we see market participation grow, we anticipate seeing new corporate bond offerings (several of which we are aware of and which will be issued as a result of the AAI scheme), as well as government privatisations of state-owned enterprises and eventually, private sector IPOs.
Waiting is the hardest and most mundane part in an investment, especially in a world where patience is in short supply, but it’s necessary nonetheless to sit on one’s hands and be patient, even amid the volatility.
| 
