Kazakhstan Chamber of Commerce in the USA

KazCham


Road to recovery

Posted on March 08, 2010 by KazCham

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.

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