The overexposure of Kazakhstan to the retail and construction sectors and significant dependence on foreign loans in the context of the decline in oil prices coupled with the financial crisis has made the country’s banks extremely vulnerable. As the global crisis deepens and the credit crunch continues, Kazakhstan’s reserves might not cope with the expected second wave of the crisis that could soon trigger a collapse of the country’s banking system.
The World Bank is concerned that Kazakhstan might become the second country after Iceland to witness the collapse of its financial system. In its Prospects for the Global Economy report, released on December 9, it is stressed that, based on credit-default swap prices and the availability of only US$15 billion to stabilize the situation, Kazakhstan is the second most likely country to face “severe banking disruptions” in the near future.
Increases in private debt flows to Kazakhstan’s private sector in 2007 produced credit growth and inflation. In 2008, however, these flows decreased by US$13.2 billion, leaving the state’s banking sector short of liquidity, vital for preventing its expected collapse. The banking industry is “shrinking as a sector,” says Michael Carter, chief executive of Visor Capital investment bank in Kazakhstan. The World Bank reports that 6 economies from Europe and Central Asia have witnessed extreme financial deterioration in terms of exchange rate depreciation, increase in spreads, and equity market declines. The equity market in Iceland, for instance, is down by 85%, in Russia by 76%, and in Kazakhstan by 70%.
According to the Wall Street Journal, developing countries have yet to experience the impact of the global crisis to be accompanied by bank failures. Kyrgyzstan’s Minister of Economy Akylbek Japarov already warned of Kyrgyzstan’s financial collapse. Standard & Poor’s and Moody’s recently lowered the credit ratings of Kazakh banks following the collapse of the Rencasia Index for Central Asia in September. Moody’s also warned about the country’s risky market and put Kazakhstan on its list of “high caution” countries.
Kazakhstan lacks borrowing opportunities due to the world credit crunch. Considering that its banks heavily depend on foreign loans, the Government may not come up with the resources to avert the forecasted financial collapse. Kazakh banks have faced a sharp increase in overdue liabilities on their $40 billion foreign loans, and the crisis of liquidity could soon become a crisis of insolvency, the Euromoney journal observes. Initially in the range of 1.5% -3%, the overdue liabilities are currently in the 7-8% range, but the figure may be 15%. BTA bank, the largest, has $1.26 billion in overdue loans, Kazcommertsbank - $2.8 billion, Alliance Bank $725 million, and ATF $700 million. B. Baishev, chairman of the Association of Kazakh Banks, reported on the gravity of the situation: “On May 2008 the deposits of individuals totaled US$12 billion US$. In other words, the Kazakh banks will have to annul all deposits of the people in order to pay out foreign debts!” Indeed, the Central Bank’s US$20 billion and the National Oil Fund’s US$15 billion are insufficient to deal with the magnitude of the crisis. The recent collapse of the Alliance Bank has provided further shocks to the financial system.
Liquidity shortages, 20 percent inflation, and a weak currency might well generate social and political instability in the country. The banking crisis will reduce Kazakhstan’s investments in the region, making Kyrgyzstan and Tajikistan currently facing account deficits and energy crises particularly vulnerable. The ensued construction and retail sector failures will also decrease remittances of migrants working in Kazakhstan. Remittances in Tajikistan alone constituted 36% of the country’s GDP in 2007. The regional growth, propelled by Kazakhstan’s impressive growth, will decline from 5.3% in 2008 to 2.7% in 2009 due to falling investments, tight financing conditions and weaker exports.
President Nursultan Nazarbayev has already pushed for a financial law to stabilize the market, intending to forbid banks from increasing mortgage rates for 3 years. US$15 billion will also be released to provide liquidity. The rescue package “will allow us to avoid…a sharp deterioration of the situation, which will enable Kazakhstan to survive the global crisis with a renewed, stronger and more competitive economy,”- stressed Prime Minister Karim Masimov. The Government promised $2 billion for BTA Bank, $300 million for Kazkommertsbank, and $500 million for both Halyk and Alliance Bank. Aitolkyn Kurmanova of the Central Asian Institute of Economic Strategies is skeptical about the measures given the size of the banks’ foreign debt. Alliance Bank Chairman Dauren Kereybayev, however, is optimistic about further effects of the crisis: “Even if there is a second wave, and there will be one, it should not affect us…Once [Kazakh banks] refinance their debt, there will no longer be such indiscriminate issuance of loans.”
The most developed in the CIS after Russia, Kazakhstan’s banking system faces a possible collapse. The substantial involvement of Kazakh banks in retail and construction sectors and high dependence on foreign loans in light of worsening credit crisis and declining oil prices have put the country at serious risk. The expected collapse could not only trigger domestic unrest, but also lead to severe economic downturn in the region. The ability of Kazakhstan to bolster its financial system will determine the success of the country’s economic performance and Central Asia’s future growth .