Clare Nuttall in Almaty -

Confident in the revival of the Kazakh economy on the back of rising commodity prices and strong government support, the mood among delegates at the Annual Fitch Ratings Conference on Kazakhstan was optimistic, despite lingering worries about the banking sector.

A year ago the conference setting, the ballroom at the Almaty Intercontinental hotel, was the same, but the mood among delegates was very different: commodity prices were still down in the dumps and a contraction of the Kazakh economy was widely forecast. But by May this year, Fitch had already raised its 2010 economic growth forecast for Kazakhstan to 4%, up from its original projection of 3%.

Much of this change in the situation is due to the upturn in global commodity prices that began in late 2009, which sent the Kazakh economy "bouncing back," said David Heslan, director of Fitch's sovereigns group. "The external environment for Kazakhstan is improving. World trade is off the floor back to around 2006 levels, and we expect global growth to rebound this year. GDP growth and industrial production are bouncing back from a sharp slowdown. GDP still has some way to go before it gets back to 2008 levels, it is still 20% below the peak in dollar terms, partly because of the devaluation of the tenge in early 2009."

The government's anti-crisis package and fiscal stimulus for the economy was another factor in the rating agency's decision to assign a stable outlook to Kazakhstan's sovereign rating back in December 2009. By that time, it had also become apparent that banks and creditors would reach an agreement on restructuring Kazakhstan's banking sector debt. Kazakhstan's fundamentals - sustained income growth and a stable social and political situation - remain good. Reserves are now back above pre-crisis levels.

Building the future

The Kazakh government is expected to continue its role as the country's main infrastructure investor. "In our view, there is no way the government is going to cancel its anti-crisis programme soon. It has already been budgeted for this year, and a lot of the money has been allocated to longer-term investment projects," said Daniel Connelly, CEO of Citibank Kazakhstan. "This is not just a fiscal stimulus: there is an underlying need for those investments."

Kazakhstan's vice minister of economic development and trade, Kuandyk Bishimbayev, also stressed the urgent need for this type of investment. "Energy infrastructure is the number-one issue in economic development," he told delegates, a point illustrated by two power outages during the afternoon session, taking out first the lights, then the overhead projector. "We are reaching our limit on energy generation, which is a further constraint on economic development. From 2003, economic growth almost exhausted our resources. The crisis was a reprieve for us because industrial production fell and so, therefore, did energy consumption. Transport infrastructure - both road and rail infrastructure and pipeline construction - is also very important."

While the government continues to channel money into the economy, delegates expressed doubts about when the banks would be able to take on this role. The main message of Fitch's associate director for financial institutions, Maxim Miller, was that the banks are stable, but it's still too early to call a recovery - despite the fact that debt restructuring at BTA Bank, Alliance Bank and some smaller financial institutions is close to completion. There are still worries about capital and asset quality, in particular at KazkommertsBank, which remains on negative outlook. "Statistics show further deterioration in asset quality in the last 18 months, and we expect this to continue in the next few months," said Miller. "Published statistics reflect the process of gradual problem loan recognition by banks rather than the real deterioration of asset quality. Estimates of problem loans are still higher than published figures."

Speakers also pointed to the strong increase in accrued interest on banks' balance sheets. "Capital and reserves are significant, but the large volume of accrued income raises doubts about quality," Miller added.

New lending also remains low, with demand for loans not yet increasing and bank directors being extremely conservative. Alexander Picker and Vladislav Lee, chairmen of ATF Bank and Bank CenterCredit respectively, said they planned to adhere to their targets of double-digit growth in lending. Mikhail Lomtadze, chairman of Kaspi Bank, which is focused on the consumer sector, said he did not see problems in growing his bank's portfolio.

However, both Fitch analysts and Jason Hurwitz, director of financial sector research at Visor Capital, took a more sceptical line. "The better banks, Halyk, ATF and BCC, are projecting double-digit growth in 2010, but it is not clear if they will be able to achieve it," Hurwitz said. "The first question everyone asks is if there are any credit-worthy businesses to lend to." Few banks have exercised their risk management functions recently, and the current tightening of banking sector regulation may also discourage lending.

The big question is still whether banks will be able to find any companies to lend to. Typically, banks have not lent directly to the oil and gas or metals and mining sectors, the largest parts of the Kazakh economy, and there is little room for growth in lending to the agriculture and food processing sectors. According to Hurwitz, deeper probing of many banks' intentions reveals plans to lend to the construction sector in order to complete existing projects, thereby increasing their exposure to the problem sector.