Clare Nuttall in Almaty -

With rising commodity prices lifting the economy in the final months of last year, there is a sense of things returning to normal in Kazakhstan. But with the urgency of dealing with the crisis out of the way, long-standing issues have once again reared their ugly heads - namely, the development of a functioning stock market and other ways to put money to work in the country.

Delegates at the CbondS Kazakhstan Financial Forum held in Almaty on March 10-11 said they had seen investors coming back to emerging markets. There were some positive signals for the local market too, including the strengthening of Kazakhstan's currency the tenge and the rise in the Kazakhstan Stock Exchange's (KASE) main index, which shot up by 96% in 2009.

The forum took place at the opulent new Rixos hotel, where last month pop stars Britney Spears and Jennifer Lopez were flown in for the president's daughter Aliya Nazarbayev's birthday celebrations. On the current occasion, however, the mood was a sober and reflective one, as regulators, investors and bankers pondered how to move forward post-crisis.

Taking stock

Kazakhstan's financial regulator, the AFN, has already been working to improve the stability of the country's financial sector, and to prevent a second bubble from emerging as the economy starts to grow again. "The crisis demonstrated that problems arose because of Kazakhstan's imperfect system to regulate risk, low level of corporate management and insufficient transparency," Alina Aldambergen, deputy chair of the AFN, told delegates. "We plan to increase the stability of the financial sector, stimulate investment activity, increase trust in the financial sector among customers and investors and mobilise financial resources post crisis, including foreign investments."

Turnover on the stock exchange fell sharply last year in line with global economic developments. This decline was mostly due to the foreign currency and repurchase agreement, or repo, markets, while the sharp increase in the KASE index was driven by the strong performance of leading stocks including Kazakhmys and KMG EP. "The KASE index looks good in comparison to other emerging markets stock market indexes," said Kadyrzhan Damitov, president of the KASE. "This year we expect to see more volatility and don't think the index will continue to grow in line with 2009, but we hope to see positive results."

There are also indications that IPOs, off the table for the last year, could soon resume. "Some issuers are preparing for potential issues. I think there will be a revival. I don't want to guess, and the final decision is by investors, but the probability is higher than last year," Damitov said.

The KASE remains relatively illiquid, with trading in Kazakh stocks on the London Stock Exchange 87 times as high as on the domestic exchange. As part of plans to increase activity on the KASE, futures markets are due to be created this year. "This issue is urgent, because a term market makes it possible to overcome the problem of lack of tradability," explained Damitov. In 2010, the KASE is planning to rehabilitate futures for the dollar/tenge exchange rate, and to introduce KASE Index futures, and futures for the most liquid shares on the KASE Index and some bonds.

Alternatives

Aside from the stock market, alternative investments were also explored at the forum. Summing up the situation in the private equity market, Abai Alpamysov, CEO of Kazyna Capital Management, commented that: "Not many investors were ready to invest before the crisis, and the number has decreased now." However, he forecast a slight upturn in 2010, as there are now 10 funds investing in Kazakhstan (five with participation from Kazyna), and a further 48 have the potential to invest in Kazakhstan as part of their CIS or emerging markets mandate - although few are active in the country as yet.

One major fund, the CITIC-Kasyna Investment Fund, was set up by Kazyna and Chinese investment holding company Citic Capital Holdings in June 2008, with an agreement to increase the fund to up to $1bn. Kazyna also aims to create a corporate restructuring fund - something that has been eagerly awaited by businesses.

In the area of Islamic finance too, "a lot has been said but we have not seen much results," according to Arken Artysanov, head of the Regional Financial Centre of Almaty (RFCA). Kazakhstan adopted a law on Islamic finance in February 2009, becoming the first country in the CIS to do so. Further legislative amendments are planned. "We are now discussing changes that would help us to implement a full range of Islamic finance in Almaty," Artysanov said. They include instruments for regulation, allowing islamic windows to open in traditional banks and changes to accounting and tax rules.

Since the law was adopted, one Islamic fund has been created and UAE-based Al Hilal Bank is expected to get its licence to operate in Kazakhstan in the near future. There are also high hopes that the Kazakh government will issue an Islamic bond, or sukuk. "It would be nice to have government securities issued as a benchmark. A government sukuk would define the position for Kazakhstan - the volume of demand, depth, potential interest," says Artysanov.