Ben Aris in London -

What's in store for the battered Kazakh bank sector? If you ask around the investment banks in Almaty, no one will give you a straight answer. Analysts are nervous because the situation remains fluid and the banks fragile. The governor of the National Bank of Kazakhstan, Grigory Marchenko, doesn't have any answers either.

"It is difficult to forecast what will happen in the medium term, as the situation could change again. We will be able to say more in August after we have had the first half-year numbers in," Marchenko tells bne during May's annual meeting of the European Bank for Reconstruction and Development. "Then it will be six months on from devaluation and we will have a better idea of the effect, as there is a four- to six-month lag. Also, by this time the audits of [troubled banks] BTA and Alliance will be in and restructuring plans will be ready."

The government is being very careful at the moment, as any wrong move could cause fresh panic after investors' confidence in Kazakhstan has taken a drubbing in recent months. BTA is the biggest bank in the country and had to be nationalised in February after it almost went bust. More recently, in May, it defaulted on some $12bn in debt after the US investment bank Morgan Stanley asked for its money back early. The state has also bailed out its sister bank Alliance after it too defaulted on its debt.

Now the authorities are falling over themselves to manage the damage. Marchenko is credited with building up one of the best banking sectors in the CIS prior to this crisis and was plucked from his job as chairman of Halyk Bank, a top-three player, to run the central bank, a position he held during the last big crisis in 1998.

Staying schtum

Everyone wants answers to their questions, but Marchenko is playing it cool until there is a little more clarity on where Kazakhstan is heading. The near collapse and default by two of the country's biggest banks have done a massive amount of damage to Kazakhstan's reputation, but Marchenko says things are not as bleak as they first seem. Still, he has advised the government not to make any public statements suggesting they will bail out any troubled bank come what may, and also not to offer sovereign guarantees on any debt. "The situation with BTA and Alliance has caught the most attention and have influenced the coverage and attitudes to Kazakhstan, including the country ratings. However, the rest of the banking sector is not in bad shape," Marchenko says. "The liquidity situation in the bank sector is good and deposits have started rising again. Moreover, after a massive outflow of cash after the Russians decided to devalue the ruble, since we devalued the tenge the National Bank [of Kazakhstan] has been a net buyer of dollars for the last two months."

The rise in oil prices, the country's main hard currency earner, has also been a salve on crisis-induced burns. At the same time, the government has rolled out a massive anti-crisis/stimulus package to put the economy back on track. But it's simply too early to say what effect all these measures will have on the economy.

In the meantime, international PR agencies have been working overtime to get the state's message out to the media and investors. A difficult situation was made worse after BTA's founder, Mukhtar Ablyazov, claimed he had been robbed of his bank for political reasons (he was jailed briefly at the start of this decade for his political activism). Then Morgan Stanley ignored the government's pleas not to accelerate repayments, causing BTA to default on all its debt.

BTA's new management insist that all creditors will be treated fairly and is continuing to pay the interest on the bank's debt, although it's not obliged to do so, as a sign of goodwill. More details on the bank's restructuring and debt repayment will be release after the government's consultants, Ernst & Young and Goldman Sachs, file their reports, expected at the end of May.

Still, while Marchenko wouldn't be drawn on the details, he did outline a general improvement in the country's macroeconomic condition that suggest the next phase of the crisis in the real economy won't hit Kazakhstan that hard.

The bugbear of inflation has retreated, falling from 20% in 2008 to 8.8% in April. The government has already pumped $2bn into the bank sector and another $1.8bn to support lending to small and medium-sized enterprises. The real estate sector has also been promised about $1bn of support, partly because many banks were heavily exposed to the construction frenzy that has gripped the country for the last few years. The central bank has also cut overnight rates three times since the start of the crisis and the deposit guarantee level was hiked from KTZ700,000 to a whopping KTZ5m, covering 99% of all deposits.

And the government has been setting the stage for the post-crisis recovery. For the next two years, all the money that would have been siphoned off into the national oil reserve fund will now go into the budget to boost spending. A new tax code has also been adopted that will slash corporate taxes from 30% to 15% over three years, putting more profits into company pockets once growth returns, and work on a new customs code that will reduce duties is currently in the works.

The state seems to have restored confidence in the bank sector amongst its own people at least and the authorities' reluctance to speculate on the future seems to have more to do with prudence than fear. Marchenko pointed out that despite the torrent of bad news, Kazakhstan remains one of the very few countries in Central and Eastern Europe that hasn't asked the International Monetary Fund for help. "I have been asked about this constantly in the last few days. Kazakhstan will not ask the IMF for help, because we don't need the money," says Marchenko with a note of exasperation in his voice. "There is a lot to do, but we are predicting that Kazakhstan will return to a mild growth of between flat and 1% growth by the end of this year."

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