Road to recovery
WHEN THE TWO most dynamic sectors of a relatively small open economy nose-dive at the same time the impact on overall economic activity can be very depressing. That is what happened to the $100 billion Kazakh economy nearly two years ago when over- borrowed Kazakh banks became the first victim of the global credit asphyxia which followed the US sub- prime mortgage crisis in August 2007.
Economic growth, which had been running at around 8/9 per cent on an annualised basis over the first eight months of the year, about average for the last seven years, dropped like a stone. Cranes stopped swinging on construction sites and a ripple effect spread right through the supply chain and into the shops as tens of thousands of building workers were suddenly laid off. Pressure on the rest of the economy rose as banks, suddenly cut off from foreign capital, scrambled to recall loans to bank customers, or roll them over at higher rates, as they struggled to repay their own maturing foreign loans.
For the Kazakh economy as a whole, recourse to cheap foreign borrowing by its entrepreneurial, privately-owned banks in the boom years was a way of monetising the expected future flow of funds from huge offshore oil and gas fields, such as Kashagan, whose development is proving more expensive – and taking longer – than originally expected. Cheap bank -loans for mortgages, large cars and consumer items generally were a way for hitherto lowly-indebted Kazakh consumers to access the higher standard of living that seemed to be assured by the apparently unstoppable rise in the global price of Kazakhstan’s main exports – oil, gas, minerals and grain.
But the second stage of the global economic slowdown, which followed the collapse of Lehman Brothers in September 2008, sparked off a precipitous fall in the traded prices of natural resources of all kinds. What had begun 15 months earlier as a construction crisis triggered off by a credit crunch became a generalised slowdown as miners, steelmakers and smelters mothballed marginal mines and/or cut output. Only the oil and gas producers and the uranium miners continued ramping up production, but even they were hit by lower prices as oil dropped to just over $30 a barrel and copper to below $3,000 a ton before starting to recover in the second quarter of 2009.
The government reacted angrily to the first phase of the crisis. Bankers said President Nazarbayev castigated them as “greedy traitors” and, with the benefit of hindsight, it soon became clear that the banks had indeed financed far more palatial mansions and luxury apartments than the number of oligarchs and aspiring middle class able to buy them- but too few flats that working people could afford in the fast-growing cities. The short-lived craze for buying top of the range SUVs and Porsches on credit also looked over the top – especially as the Almaty Metro project dropped even further behind schedule and road construction generally failed to keep up with the growth in traffic and air pollutions
But the real crunch in what is now an almost two year long crisis came in February 2009, always a bleak month in the heart of the Steppe winter, when the government issued a blizzard of instructions – and put the resources of the National Fund to work shoring up bank balance sheets. The Fund, flush with $24 billion set aside from oil revenues in the fat years for just such a rainy day, transferred $10 billion to Samruk/Kazyna, the state holding company and de facto sovereign wealth fund. Further billions were shovelled into financing nearly completed construction projects, converting luxury flats into more affordable properties for civil servants, especially in Astana, and replacing banks as financiers to some credit-starved construction companies.
But the clearest sign of a new determination to tackle an economy heading for zero growth – or worse – came with the appointment of Grigori Marchenko as chairman of the National Bank. One of his early acts, in February, was to decree an 18 per cent devaluation of the Tenge, with a 3 per cent fluctuation margin either side of the new Tenge parity of KZT150 to the US dollar. It was KZT120 before devaluation. This helped the export orientated minerals sector – but aggravated the foreign debt burden of the banking system.
The most controversial move was virtual nationalisation of the country’s biggest and hitherto fastest-growing bank, BTA, as Samruk defenestrated the bank’s former president, Mukhtar Ablyazov, and injected $1.7 billion in return for a controlling 76 per cent stake. At the same time Samruk poured another h $3 billion into the two remaining ‘big three’ banks – Kazkommertzbank and Halyk Bank, in return for a quarter of their equity, and warned creditors of Alliance Bank that re-financing the smaller of the top six banks would only happen if they first agreed debt-n restructuring terms.
Samruk’s role in the bank re-capitalisation underlined the accumulation of wealth and power into its hands over the last three years or so. Set up ostensibly to improve the standard of management in state owned companies, critics see its hydra-like control over the ‘commanding height’ of the Kazakh economy – railways, telecoms, power distribution, airlines and the state oil and gas corporation KMG – as a reincarnation of Soviet-style control over the economy, a sort of Gosplan designed by McKinsey.
Inside the arched Astana headquarters of Samruk, h and the ‘Golden Horn’ building housing formerly autonomous Kazyna, now merely the financial arm of the merged Samruk/Kazyna, planners and strategists have swapped the obtuse language of Soviet bureaucracy, which older staff grew up with, for the equally impenetrable jargon of US-style management consultancy speak. Samruk, say some of its fiercest internal critics, has become like the UK’s BBC – a system of outdoor relief for the children of the elite, setter at analysing problems than deciding and executing decisions.
One of the big questions over the future of the economy is whether the rise of Samruk/Kazyna, headed by Kairat Kelimbetov, points to ever greater state control over the economy, and a more crypto- soviet future, or whether the accumulation of economic and financial power in its hands – Kazatomprom was the latest big corporation to come under its control – marks a temporary expedient until a new generation of political leaders emerges md controls can be relaxed.
Whatever the outcome, which is of great interest to foreign investors, the macro-economic developments of the last two or three years already point to the possibility that a much stronger and better balanced economy will emerge from this crisis.
The big developments now taking place include major modernisation of the road, rail, port and Dther transport infrastructure to create a shorter, modern transit route between China and Europe and an to Iran. At the same time Kazakhstan’s export pipeline arrangements are being transformed with new 3,000km-long oil and gas export pipelines from the Caspian Sea to Western China, expansion of the ZPC and other pipelines through Russia – and a new southern energy transit route across the Caspian Sea to Azerbaijan and Georgia. China is rapidly raising its profile and weight in the economy alongside Russia, Europe and the US. Next year Kazakhstan will become the world’s biggest producer of uranium. All these themes, and more, are treated, in greater depth, inside this edition.
Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 23-24.
Tags: Astana, crisis, foreign companies, Investment, Kazakhstan, National Bank, Projects
