KZBlog

As the banking sector in Kazakhstan is viewed internationally as unstable, the government is taking controversial measures to try to stabilize the financial sector, including buying out shares of Kazakhstan companies and cutting the budget to put 4 billion tenge aside as a reserve fund to bail out banks.

Last week it was reported that Standard and Poor downgraded Kazakhstan’s credit rating to BBB-, the lowest rank still within investment grade:

while “”slightly less creditworthy” than before, Kazakhstan is “still relatively safe” to lend to, according to [Ben Faulks, a London-based S&P sovereign-ratings analyst]. “We have taken this step of moving Kazakhstan down by one rating but we still keep it within the ‘investment’ grade,” Faulks said. “In other words, we still consider it a solid country from the point of view of commercial debt repayment and we have a stable outlook, so we expect the difficulties to be managed.”

The primary reason for the downgrade is that banks in Kazakhstan depend heavily on foreign loans which they then invest in real estate, both inside Kazakhstan and in foreign projects. That means Kazakhstan banks are both heavily dependent on foreign lenders and on the real estate market, which is currently unstable worldwide in part due to problems in the US real estate market.

Problems in the Kazakhstan real estate market have been noted earlier, with many claiming that prices are artificially inflated–and anecdotal evidence suggests that prices in Astana and Almaty are equal to, or more expensive than those in major cities in the US. Last month banks declared a moratorium on further mortgage lending to try to cope with the problem. Kazakhstan banks and companies have also come under heavy criticism in the past for exploiting its neighbors with weaker economic situations, buying real estate in Georgia and Kyrgyzstan and offering low compensation to property holders. This could lead to legal restrictions on foreign companies in the real estate or development market, cutting one major source of profit for Kazakhstan banks.

A number of banks have also failed recently, including Center Credit, according to local news services. Besides being damaging to the market, news has covered people trying to recover their savings, creating bad press for the bank sector in a country where people still keep their savings in cash under the mattress instead of in banks. Of course, the two issues are related as banks which make their money on foreign investment are less willing to offer better customer service, and better security for the public. In turn the public is less willing to put its money in banks, making private accounts a relatively small part of profits, causing banks to focus on other areas such as foreign investment. And so on.

Now the President has announced that the government may buy back shares in Kazakhstan companies. This will create an increase in demand, driving up prices and possibly allow for the government to subsidize Kazakhstan companies once they are owned by the government. A number of banks such as Kazkommerts, Halyk Bank, and Alliance Bank are listed on the London Stock Exchange, as are KazMunaiGas and KazMyz, the copper company. Critics see this move as an attempt to de-privatize the banking sector or at least to artificially prop up a failing sector with government subsidies, rather than dealing with underlying problems. The recent controversy over Nurbank, ended with Dariga Nazarbayeva, daughter of the President, being named as Chairman of the Board of Directors. The largest shareholder is now Nurali Nazarbayev, her son. Another high government official recently sold his controlling shares in ATF Bank, indicating that members of the government are involved in the banking sector, making some skeptical about the sudden attention on protecting the banking sector.

Most troubling is that, next year’s budget having just been approved, the President and Prime Minister have called for Ministries and government agencies to cut this year’s budget in order to free up 4 billion tenge. This money will go into the reserve fund to bail out the banking sector, which reportedly already has 10 billion tenge in it. Some are unhappy that social services and line ministry projects will be sacrificed for mistakes made by banks. Particularly with only 2 months left in the year, the request came as a shock for many. At the same time, reportedly money will be reserved for government companies to buy out shares in Kazakh companies. The rumor is that Kazina and Samruk and Samgao will be given budget funds for this purpose.

It is certainly important for the government to pay attention to weaknesses in the banking sector and protect its citizens who have savings in the bank. This is standard practice in most nations, such as in the US where we have the FDIC. However one hopes that banks will learn their lesson and change their policies to reduce dependence on foreign lenders, to increase the domestic market, and to diversify investments. One suspects that Standard and Poors is looking for more than a Band Aid to these problems.