Booming Financial Markets -- September 1998

Two tier banking system	The banking system in Kyrgyzstan consists of two tiers – the National Bank and second tier banks. The National Bank (NBK), established in March 1992, acts as the major regulatory body over the entire banking sector through banking licensing and supervision. Moreover, the National Bank’s key objective is to achieve a reasonable level of inflation and to maintain the stability of the national currency’s exchange rate. The National Bank, managed by a young, dynamic and professional team, has managed to control the exchange rate after the introduction of the national currency, the Som.
Second tier banks – classification	According to the Banking Law, there is a separation between universal and specialised banks. Universal banks are licensed to provide a full range of banking operations, including investment activity. Specialised banks are those operating in one or more sub-sectors, and therefore, are restricted to specific sectors of the national economy.
Banking sector reform	Banking sector reform in 1996-97 was aimed at improving the level of banking supervision and financial reporting. As a result, the new prudential regulations designed in compliance with the regulations of the Basle Committee on Banking Supervision, as well as the new principles of accounting and financial reporting (IAS-format) have been successfully introduced. Tightening of the NBK’s requirements led to a decrease in the number of second-tier banks (up to 17 in 1996) and the number of banks stabilised in 1997.
Securities market 'watchdog'	The Kyrgyz stock market is obviously in the very first stage of development. Nevertheless, the main building blocks of the securities trading infrastructure are there, including independent registrars and the government industry watch-dog. Given the size of the economy at this stage, the choice for portfolio investors is limited to a handful of large Kyrgyz corporations. The development of the local stock market will depend on whether or not the Kyrgyz regulators will accommodate the needs of international investors. A very important test of the nascent Kyrgyz democracy will be the privatisation issue and the politically touchy issue of balancing reasonable protectionism for national investors with openness for overseas investors.
Emerging securities market infrastructure	Apart from the government’s regulatory body, other elements of the securities market infrastructure are emerging. The Kyrgyz Stock Exchange, founded in 1994, was successful in organising trades with privatisation coupons and then, first trades with corporate securities. As of April 1998, shares in 32 companies were traded on the Kyrgyz Stock Exchange.
Some figures	The National Commission on the Securities Market estimates foreign portfolio investment to be about USD 50 million as of 1 July 1998. Regulatory authority also reported that cumulative capitalisation of registered joint stock companies is about USD 670 million on the same date. The securities market infrastructure consists of 86 licensed professional participants, including 16 investment funds, 35 broker-dealer companies, 12 investment consultancies, 3 asset managing companies, 18 specialised registrars, the Kyrgyz Stock Exchange, and the Central Depository.
Major concerns	The major concern for portfolio investors is the limited number of relatively large companies in Kyrgyzstan. Another reason to worry is the national economy’s high level of dependency on the environment. To some extent this is a good factor, showing the openness of the economy and its accelerated integration into the international community. But, at the same time, a recent cyanide leakage in the Issyk Kul lake caused a shocking decrease in the number of tourists visiting this recreation area. As a result, the regional economy seriously suffered from a sharp decline in revenues. Apart from its obvious positive effect, the accession of Kyrgyzstan into the WTO has a set of negative side effects. The anticipated reduction in tariffs and duties, as a part of the accession package could weaken the system which protects the infant domestic economy from external competition. Some discussions currently featured in the local and regional media raise concerns over the fate of Kyrgyz companies in light of lightening the trade regime, increased competitiveness, and therefore, the inevitable number of bankruptcies among domestic companies.