Azernews.Az

Qabil Ashirov

Read more

Azerbaijan’s capital market is showing signs of an important transformation. Changes at the Baku Stock Exchange, the growing use of electronic trading infrastructure, and the successful IPO of PASHA Bank have brought new momentum to the country’s securities market. The PASHA Bank offering attracted thousands of investors and followed the growing participation of retail investors in Azerbaijan’s capital markets, including the large number of individuals who participated in previous share offerings such as ABB. This expanding investor base could become increasingly important not only for the stock market, but also for the development of the country’s bond market.

One of the most significant changes now underway is the planned automation of the secondary segment of the bond market. This may sound like a technical development, but its potential impact on investors is much broader.

Traditionally, buying a corporate bond in Azerbaijan has often meant holding it until maturity. An investor could receive an attractive coupon, perhaps 15%-18% annually, but selling the bond before maturity could be difficult if there was no active secondary market or readily available buyer.

A more developed and automated secondary market could change this dynamic.

Suppose an investor buys a bond with a nominal value of 1,000 manats and an annual coupon of 18%. Under a traditional approach, the investor would simply collect the coupon payments and wait for the issuer to return the 1,000-manat principal at maturity.

With a functioning secondary market, however, the investor could potentially sell the bond before maturity. If another investor is willing to pay 1,100 manats, the original investor could receive a 100-manat capital gain in addition to the coupon income already earned.

The important word here is “potentially.” Automation does not guarantee that a bond can always be sold at any desired price. It makes trading easier, but liquidity still depends on the presence of buyers and sellers.

This distinction will be crucial for Azerbaijan. A genuinely liquid market requires not only an electronic platform, but also a large investor base, active brokers, sufficient trading volumes and eventually market makers that can provide continuous buying and selling interest.

If these conditions develop, bonds could become a much stronger alternative to bank deposits.

Consider a simple example. If a bank deposit pays 12% while a corporate bond offers a 17% yield, the bond may appear considerably more attractive. However, an investor may still prefer the deposit because it is simpler and does not require finding a buyer when the money is needed.

If the secondary bond market becomes sufficiently liquid, that calculation changes. An investor may begin to think: “I can earn 17% and, if I need the money, I can sell the bond.”

This could create competition between Azerbaijan’s bond and deposit markets.

If large amounts of money move from deposits into corporate bonds, banks could face pressure to offer more attractive deposit rates in order to retain their funding base. At the same time, stronger demand for bonds could push their market prices higher, reducing their yields.

In other words, the same flow of money could put upward pressure on deposit rates while putting downward pressure on bond yields.

For example, the market could gradually move from a situation where deposits pay 12% and corporate bonds offer 17%-18% toward one where deposits offer 13%-14% while bond yields decline to 15%-16%. The exact outcome would depend on inflation, monetary policy, credit risk, liquidity and the supply of securities.

This is also where the difference between a bond’s coupon and its market yield becomes important.

If an investor owns a 1,000-manat bond with an 18% coupon, the issuer does not automatically change the coupon when the bond starts trading on the secondary market. Instead, the market price changes.

If new bonds are being issued at 13%-14%, an existing 18% bond may become more valuable and could trade above its 1,000-manat nominal value. Conversely, if new market yields rise to 20%, the same 18% bond could trade below nominal value.

For investors, this creates both an opportunity and a new risk. A liquid secondary market can provide an exit option and the possibility of capital gains, but it also means that the market value of a bond can fluctuate before maturity.

The broader development of Azerbaijan’s capital market makes this particularly relevant now. The arrival of thousands of retail investors through major IPOs means that a much larger pool of individuals is becoming familiar with shares, brokers, securities accounts and market prices. Some of these investors could eventually diversify into corporate bonds, government securities and other financial instruments.

The result could be a gradual shift in Azerbaijan’s financial culture. Instead of viewing savings primarily through the lens of bank deposits, individuals could increasingly compare deposits, bonds and shares based on risk, return and liquidity.

Azerbaijan will not immediately have the liquidity of the US or other highly developed financial markets simply because its secondary bond market becomes automated. The infrastructure is only one part of the equation. The market also needs sufficient participants and trading activity.

Nevertheless, the direction is significant. If the investor base continues to expand, IPO activity remains strong and the secondary bond market becomes more liquid, corporate bonds could evolve from instruments that investors mainly hold until maturity into securities that can be actively traded.

For investors, that could represent a fundamental change: a bond would no longer simply mean locking money away for several years in exchange for a high coupon. It could increasingly mean earning regular income while retaining the option to sell the asset when market conditions—or personal financial needs—change.

That is precisely the kind of development that could help Azerbaijan move toward a deeper, more diversified and more market-oriented financial system.