After years of dramatic growth and borrowing, Kazakhstan’s banks are feeling the strain of this summer’s credit squeeze. At the end of 2006, Kazakh banks had $33 billion of outstanding foreign borrowing, but by June this year, the figure had swelled to more than $40 billion.
A surging domestic credit market has seen average annual credit growth of 75% over the last three years, and lending expanded by almost 40% in the first half of 2007 alone. The lending boom has been principally funded by foreign borrowing, which has grown from 38% of total liabilities in 2004 to 52% at the end of 2006.
The global credit crunch has hit Kazakh banks particularly hard with their debt, equity and credit default swaps all bulging out – bond spreads widened on average by 200 basis points. Since June, not a single Kazakh bank has successfully tapped the international bond markets, while only two – Kazkommertsbank and Halyk Bank – have succeeded in raising syndicated loans, both smaller and at less attractive terms than first anticipated.
Downgrade
In early October, concrete evidence that this liquidity squeeze was affecting Kazakhstan’s economic fundamentals emerged when Standard & Poor’s downgraded the Republic of Kazakhstan’s sovereign foreign currency ratings to BBB- from BBB, citing growing concern about the impact of an adverse international financial environment on a country whose banking system has such vast external financing needs. Kazakh bank balance sheets remain heavily dollar-oriented, and foreign borrowings comprise between 50% and 70% of liabilities.
In April, the National Bank of Kazakhstan (NBK) first moved to deal with the problem, increasing the amount capital banks had to set aside to cover external borrowing. In August, it announced it was raising the minimum reserve requirement on banks’ foreign liabilities to 10% from 8% and cutting the reserve requirement on domestic liabilities to 5% from 6%.
The NBK’s charismatic governor Anvar Saidenov believes these measures were adequate, although he admits in hindsight that they could have been implemented sooner. “The restrictions imposed by the supervision agencies were strict and up to the challenge. We are moving in the right direction, lifting our reserve requirements step by step. But, of course, maybe they were not strict enough, because the foreign borrowing of our banks during the last couple of years increased considerably. The result is what we are seeing now.”
But the national bank does not regard the difficulties in refinancing as a major problem. “The combined international debt payments come to about $3 billion per quarter, which is reasonable for the financial sector, and is no cause for concern,” says Saidenov. “The national bank believes that commercial banks will be in a position to settle their debts if they have limited access to foreign markets. If needs be, the national bank is prepared to grant second-tier banks short-term loans.” In mid-August, the national bank offered banks short-term liquidity in the form of one-week tenge loans against balances of their reserve accounts, extending more than Kzt1.3 trillion (over $10 billion) of short-term liquidity to 15 banks including Citigroup and HSBC.
Although he acknowledges that the NBK could raise rates to curb the economy in the first quarter of 2008, he is closely watching the effects of tighter credit markets. “A decline in the credit activity of our banks could be seen in July and August. There will be a cooling effect in the last quarter, which could help with inflation,” Saidenov argues. He adds that the leakage of dollars into the economy from bank borrowings abroad was a significant contributor to overheating. “Now that we have this cooling wind, at least we have some break and some hope of lower inflation figures for the first half of 2008.”
The country’s property market, which has been riding the crest of a wave for the past three years, may at last cool according to Saidenov. Potentially, this could have damaging effects on banks that have heavy exposure to the sector – particularly Bank TuranAlem and Kazkommertsbank. “Risks for the banks do exist if the property bubble bursts,” says Saidenov, who notes that some of the boom was driven by speculative activity. “At the end of August 2007, the share of mortgage credits accounted for 9.7% of all credit in the Kazakh economy. State bodies are examining ways of resolving any issues that may arise, with the aim of calming down the situation in the property market.”
Confidence in the system
The talk in the boardrooms of Kazakhstan is firmly on the banking sector and its ability to withstand the global liquidity squeeze. Few want to see a Northern Rock happen in Kazakhstan. “I was shocked to see those pictures,” says Saidenov, speaking of the images of Northern Rock customers lining up to withdraw their deposits.
But Saidenov is confident Kazakhstan will not face a bank run or worse still, a failure. “We are having regular meetings with bank heads, and one of the positives to come out of these events has been this monitoring of the situation by the regulators. But of course, the situation is still shaky, and it will go on like this for some time.”
He also suggests management at the country’s top banks must take responsibility for their prolific borrowing and its consequences. “It is important to point out that market participants must assume the responsibility for the consequences of their decisions. The state, for its part, is creating the necessary conditions and will contribute to the development of the economy, but on the whole, what is required is an improvement in the quality of the management on the part of those who are active in the market.”
Despite this, Saidenov loyally believes investors have overreacted to the credit squeeze and punished Kazakh banks unduly without distinguishing the good credits. Equally, he is not concerned about the full weight of the increased cost of borrowing for Kazakhstan’s banks being passed on to consumers. “Profitability of our banks is extremely high, so to some extent I think the banks will cut their profits. That’s a natural reaction to such a situation. There will be some additional pressure on end-borrowers, and maybe some problems with the loan portfolios will emerge, but I don’t think it will be a widespread phenomenon.”