Richard Hainsworth of Global Rating -
The Almaty International Banking Conference, held in September, always provides a useful indicator of the prevailing trends in Kazakhstan. The dominant question was whether the liquidity crunch in the international markets would have a material affect on the Kazakh banks. The answers to this question depend on timescale, but are fairly clear cut.
Kazakh banks, and in particular the top five, benefitted spectacularly from a perception that the Kazakh banking system was better than those in any of the other CIS countries. The growth story prompted international investors, quite a few of whom had no previous experience in the CIS, to join in the various syndications and bond offerings of the Kazakh banks. By the begining of this year, the Financial Services Regulator in Kazakhstan (the AFN, from the Russian acronym) was sufficiently worried to introduce new constraining regulations. The banks protested rigorously, going directly to the president to bypass the regulator.
At this point in time, one Kazakh bank, Caspiisky, has quietly repaid a routine syndication repayment; another bank, Nurbank, is set to pay on a coupon from its debut Eurobond; and Alliance Bank has $320m to repay by the end of the month.
The National Bank (Kazakhstan's fiscal regulator) has publicly stated that it will make funding available to any bank unable to meet foreign financial obligations during the crisis. Moreover, National Bank figures indicate that currency reserves and the country's oil stabilisation fund approximate the total outstanding debt of the Kazakh banks. Another estimate places total outstanding debt of the Kazakh banks at 160% of the total foreign reserves and the fund. Nevertheless, given that the banks need to repay over a period of several years, and the foreign reserves and fund consist of liquid assets, there is sufficient cash for the government to cover the banks for even an extended crisis.
Moreover, some of the Kazakh banks have already managed to attract new syndications, even after the onset of the international liquidity crunch.
The only outstanding issue is Alliance Bank. It seems fairly certain that international lenders are going to require Alliance Bank demonstrate its inherent ability to manage the crisis. In theory this should not be a problem. The bank has a portfolio of short-term loans, and hence it should be able to contract its balance sheet rapidly enough to meet the repayments. Moreover, the National Bank will make funds available if the Bank requests help - Alliance is too big a bank for the National Bank to allow it to fail, especially in the current highly sensistive atmosphere. The price - both financially and politically - that Alliance will need to pay is likely to be steep.
The outcome of the crisis for the Kazakh banks is likely to be extremely beneficial. On one hand, it seeems likely that all of the banks will get through the crisis with only a modicum of pain. On the other hand, the crisis has made the banks take stock of their overall strategies.
Total banking assets as a ratio of GDP has risen to 90%. This compares with the figures for a mature Western economy. Since the Kazakh economy is by no means mature, it is certain that the ratio is too high. Either assets are overpriced locally or substantial investments have been made outside Kazakhstan. Either way, the banks need to reconsider their growth plans.
Kazakhstan also needs to substantially increase its local funding market. It is extremely dangerous for the banks to have to rely wholly on foreign funding. Yet, currently the banks are unable to refinance themselves locally. In principle, there should be no shortage of finance locally - the country has some very strong exporters. But currently, there is no effective mechanism for local investors to invest in the Kazakh banking sector.
Final conclusion: the global liquidity crunch has affected the Kazakh banking sector, but it is more a cold shower than a death blow.
Richard Hainsworth is the CEO of Global Rating, the leading bank rating agency covering the CIS financial sector
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