Gunter Deuber and Gintaras Shlizhyus of RZB Group -

Because of the heavy foreign issuance activity of Kazakh banks, the national banking regulatory agency recently presented a draft regulation that stipulates tighter limits on foreign borrowing.

The draft is very likely to be implemented and should curb risks from the rising external indebtedness of Kazakh banks. The regulation is likely to come into

effect in March.

According to the new provisions, foreign borrowing should not exceed a sum equal to five times the bank's capital. Thus, banks either have to restrict their

foreign issuances or increase their charter capital if they are close to the threshold. It seems that Kazakh banks will have to do the latter (or strive for more

international cooperation) because the domestic capital market is very thin.

Kazakh banks rely heavily on foreign borrowing to finance their growth strategies and the rapid expansion of the Kazakh economy. They have not reduced foreign borrowing even though they have had to deposit 8% of their average monthly foreign debt at the National Bank of Kazakhstan (NBK) since July 2006. Thus the new regulation will have a very mild impact on Kazakh banks' issuance activity in the Eurobond market.

We believe that the limit on foreign borrowing should counter the deterioration in credit quality owing to foreign borrowing, because banks will have to increase

their charter capital. The measure might also help to curb the excessive supply of new issues from Kazakhstan in the secondary market.

Kazakh banks have already issued four Eurobonds worth $2.474bn to date in 2007. At least $500m are maturing in the coming 12 months and have to be refinanced, while the aggregate planned issuance volume could be up to $6bn in 2007, with up to $1.5bn issued by end of February.

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