Kazakhstan Chamber of Commerce in the USA


Banking overview 0

Posted on March 06, 2010 by KazCham

KAZAKH BANKS ACCUMULATED $45 billion of foreign  debt in a few years of heavy borrowing to fuel their dynamic growth. As a result they became the first  victims of the global financial crisis sparked off  by the US sub-prime crisis in July 2007. Nearly two  years later, the crisis is still being worked through.  BTA, the country’s largest bank, has been virtually  nationalised; another two of the ‘big six banks’  have been partially recapitalised with state money, while two have been helped out by their new  foreign bank owners; and the sixth, Alliance Bank,  is still struggling to find a future either through nationalisation or a foreign takeovers.

BTA, the largest pre-crisis bank, has been virtually  nationalised, and Samruk, its effective new owner  after a $1.7 billion partial re-capitalisation in February, is seeking both to re-schedule its $11 billion foreign  debt and attract a new foreign owner. Russia’s  Sberbank is one interested party, but others may  come forward. The future of Alliance Bank, the fourth  largest, was still in doubt at time of writing, but  Central Bank president Grigori Marchenko hinted that  it could be allowed to fail if creditors cannot agree a  debt restructuring deal acceptable to Samruk/Kazyna,  the state holding company charged with re-capitalising and restructuring the banking system.

Halyk Bank and KazkommertzBank (KKB), the  surviving duo of the former ‘big three’ leading  Kazakh-owned banks, ceded 25 per cent of their  shares to Samruk in return for capital injections  in February, when the state intervened to restore  confidence in the battered financial system. They expect to return to full private ownership within the  next few years. The government insists that de facto nationalisation of some banks and state-financed  re-capitalisation of others is a short- to medium-term  emergency operation to cope with the effects of a  global crisis – and not an attempt permanently to  expand the state’s role in financial markets.

In the three years leading up to the crisis, Kazakh  banks grew at a phenomenal rate – virtually doubling h their assets and liabilities every year – before being  halted in their tracks in August 2007. As they struggled to recall loans or refinance at higher rates, the ensuing credit squeeze throttled the construction h industry and lending for consumer goods and mortgages, and non-performing loans, rose.

The creation of a well-regulated domestic banking system, together with pension funds, a stock market and a government-run National Fund to absorb and conservatively invest ‘surplus’ oil money for a rainy  day, was one of the biggest successes of the first years  of independence. It was therefore reassuring when  Grigori Marchenko, one of the main architects of  banking reform and probably the country’s most  experienced banker, was recalled by President Nazarbayev in January to head the National Bank,  as the wider economy reeled from the collapse of  commodity prices, which followed the demise of  Lehman Brothers.

Record high commodity prices cushioned the  impact of the first stage of the Kazakh banking crisis  and made it possible for banks to repay all their  maturing loans over the first 15 months or so of the  crisis. But the collapse in the value of the country’s  main exports ushered in a new and more acute phase  of the crisis. The partial recovery of oil, copper and  other key commodity prices in the second quarter of  2009 provided the first chink of light at the end of  what has already been a nearly two-year tunnel.

Marchenko, an acerbic free-thinker with experience of both international financial institutions (such  as the World Bank) and the private sector, where  he worked at Deutsche Bank, masterminded  Kazakhstan’s successful navigation of the post-1998  Russian rouble crisis when he was last president of  the Central Bank.

For four years before his re-appointment,  Marchenko ran Halyk Bank, the privatised former  state savings bank. In 2006 Halyk raised $748 million  from a London IPO in 2006, which brought in foreign h institutional investors while retaining control by  the bank’s well-connected main shareholders, Timur  Kulibayev and his wife.

While Halyk’s main competitors – KKB, which  had similarly raised $845 million from an IPO in  2006, and BTA – opted for foreign-funded growth at  breakneck speed, Marchenko ran a more conservative ship. He repeatedly warned of the dangers of reckless borrowing. He warned that Halyk’s own internal  research indicated that the banking sector had become “an accident waiting to happen” months  before the crisis erupted.

Those banks with foreign equity from IPOs and/or  foreign shareholders have fared best in the current  crisis. But when foreign lending dried up and  commodity prices collapsed in 2007-8, globalisation  became a double-edged weapon as Kazakhstan got  lumped together indiscriminately with much less  well-endowed and well-run economies. Fortunately  for Kazakhstan, but less so for the foreign banks who paid top dollar before the crisis broke, Italy’s  Unicredito paid $2.3 billion for ATF Bank and South  Korea’s Kookmin Bank paid $1 billion for a majority  stake in BankCentreCredit (BCC) a few months before the crisis broke. Anvar Saidenov, National Bank  president at the time, was delighted to welcome the  deep-pocketed newcomers, noting that “Kookmin  alone had more assets than the entire Kazakh  banking system put together.”

Significantly the only ‘top three’ bank not ready to launch an IPO three years ago was BTA Bank, which  has been the main casualty of the banking crisis,  together with the much smaller Alliance Bank. The  latter’s headlong leap into consumer and mortgage  finance made it vulnerable and it was unable to lock  in a foreign buyer in time.

In the months leading up to the 2007 crisis, dozens of foreign banks were looking for Kazakh  acquisitions, although many of them, such as  Austria’s Raiffeisen, were deterred by the high  multiples demanded. Now the boot is on the other  foot, as BTA spearheads the search for new foreign  investors and smaller banks seek either foreign partners or mergers as the government raises minimal capital  and other requirements.

The crunch came in early February this year when  Marchenko, who had privately advocated devaluing  the Kazakh tenge in the autumn of 2008 in line  with the Russian rouble, announced an 18 per cent  devaluation from around tenge 120 to the US dollar,  to a 3 per cent margin around a new tenge 150 central  rate. Devaluation added to the foreign currency repayment burden of all banks – but especially to BTA,  the biggest borrower of all, with over $11 billion in foreign liabilities. In March, BTA’s new chairman, Anvar  Saidenov, announced that UBS and Goldman Sachs had  been appointed as financial advisers to help the bank  re-schedule its debts and find a new owner.

Tough rescheduling negotiations lie ahead for Kazakh banks. But Marchenko told the Eurasia Media Forum  in Almaty in April that Kazakhstan’s foreign debt had  already been reduced from $56 billion, or around 50  per cent of GDP, in summer 2007 to $35 billion by  the beginning of April 2009. “The banks will still be  servicing their debts after the second quarter and by  June it will be clear that the foreign borrowings issue  will be resolved,” he added.

A leaner, wiser and temporarily smaller and more  locally-focused banking system is emerging. The  government wants banks to concentrate more on  financing small and medium enterprises (SMEs) and  institutions like the EBRD and the Asian Development  Bank are supporting this. The EBRD, for example,  recently provided two loans totalling $100 million to  support SME lending by ATF Bank. Its parent bank,  Unicredit, also stepped in to shoulder repayment of $500 million-worth of ATF’s maturing foreign loans.

Increasingly, Kazakhstan is looking to the Middle  East and Asia for finance, trade and banking links.  President Nazarbayev signed a $10 billion oil and  infrastructure investment and financing deal with  China during his state visit in April, for example,  and a month later a major South Korean delegation  came to Kazakhstan to sign finance and investment  commitments totalling $5 billion.

Meanwhile, the rise in oil prices above $60 a barrel  and a lift in commodity prices generally in April/May  helped restore liquidity to some of the banks’ main  customers and the banking system itself. It has been a  heart-stopping ride since summer 2007 – but, as markets gradually recover and new sources of finance open up,  Kazakh banks should also benefit.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 80 – 81.

Light at the end of the tunnel 0

Posted on March 06, 2010 by KazCham

Kazakhstan is heading for economic recovery nearly two years after the country’s heavily indebted banks became the first foreign victims of the global financial crisis, which began in the US. Economic growth fell from near double digits to around zero by the end of 2008 as commodity prices nosedived. The collapse in global prices for oil, copper and other export commodities reifoced the effects of the original banking crisis, which had sent shock waves through the construction and related industries as banks recalled loans and scrambled to repay maturing foreign debt.

Nearly two years after the onset of the banking crisis, the fate of two of the largest six banks – BTA and Alliance Bank – still hangs in the balance. Creditors face heavy losses from tough restructuring terms designed to keep the banks alive without saddling the state with heavy bailout costs. This is bad news for investors in Kazakh bank debt. But, paradoxical as it may seem, the hard line now being taken by the National Bank with the foreign banks and institutions which lent so freely to Kazakh banks in the boom times reflects a growing sense that the Kazakh economy has already come through the worst.

When the Kazakh tenge was devalued 18 per cent against the US dollar in February, foreign exchange markets factored in further weakening, which newly re-appointed National Bank President Grigori Marchenko insisted would not happen. Since then, oil prices have virtually doubled to more than $60 a barrel, copper prices have risen 60 per cent to more than $5,000 a tonne, and whatever the shape of the expected global recovery, Kazakhstan, with its rich resource base ,strategic position between China, Europe and the Middle East and rising investment in basic infrastructure will be one of the principle gainers. The next movement in the tenge is more likely to be up than down.

Commodity prices are not the only factor affecting confidence. A spate of top-level personnel shuffles and the arrest of senior officials in Kazatomprom, the state-owned nuclear mining and engineering corporation, on theft and corruption charges which many see as controversial, have unsettled both domestic and foreign investors.

President Nazarbayev, who presided over Kazakhstan’s seamless 1991 transition from Soviet Republic to sovereign state, is 68 years old, still active and vigorous. The next presidential elections are not scheduled to take place until 2012. But the last decade of rapid economic growth and the emergence of a new middle class is reflected in the maneuvering of the rising generation preparing to take greater power and responsibility in the years ahead.

The economic crisis of the last two years has inevitably impacted on this on-going transition process. The tensions are reflected in part by the recent concentration of economic power in the hands of Samruk/Kazyna, which doubles as a de facto sovereign wealth fund and industrial holding company. Samruk, which is headed by Kairat Kelimbetov, former head of the Presidential  Administration, was originally set up to inject modern, market-oriented management methods into the state sector of the economy.

It controls the ‘commanding heights’ of the economic system – Temir Zholy, the state railways; Kegoc, the national power grid; KazMunaiGaz, the state oil and gas corporation; KazkhTelecom, the main telecoms provider; and Air Astana, the national airline. This year it added to this ‘traditional’ portfolio by becoming the main shareholder in BTA Bank, a major shareholder in both Halyk and Kazkommertz Bank, and also took over the former direct state holding in Kazatomprom.

This concentration of ownership reflects the President’s choice of Samruk as the main instrument for carrying out the rigorous anti-crisis policy unveiled in February. Faced with a drying up of foreign bank finance, the government decided to deploy the billions of dollars prudently stashed away in the Norwegian-style National (Oil) Fund and central bank reserves during the boom years. Oil revenues were scrupulously separated from the budget and invested conservatively abroad under the watchful eye of the central bank and the Ministry of Finance.

Some $10 billion of these ‘rainy day funds’ of around $47 billion were transferred to Samruk in February in order to recapitalize the main banks and channel fund into selected support for the construction industry, finance for small and medium enterprises and agriculture.

At the same time, however, President Nazarbayev came back from a recent state visit to China with a $10 billion package of financial assistance, including a $5 billion investment by the Chinese state oil company in a joint venture with KazMunaiGaz. This financial boost from China was followed shortly afterward by a $5 billion investment and financing package from South Korean banks and enterprises. This shift in emphasis towards closer ties with Asia is a part of a global re-positioning in economic power away from the traditional sources of capital and technology in Europe and the US towards China and other dynamic financial surplus countries in Asia.

Two years ago, just before the boom collapsed, South Korea’s Kookmin Bank paid a total of $1 billion for contral of BankCenterCredit (BCC), while Italy’s Unicredit paid $2.3 billion for ATF Bank. Both new foreign owners have since injected further capital into their Kazakh acquisitions,  which both  see as potentially profitable investments in Kazakhstan’s long-term future. International investment banks have also been quietly building positions in the country with JP Morgan, Deutsche Bank and UBS prominent amongst recent arrivals keen to potion themselves for Kazakhstan’s expected emergence as a regional financial hub by the middle of the next decade – a prospect also attracting banks from Russia, Asia and the Middle East.

This quiet positioning of long-term investors contrasts with all the superficial signs of an economy in temporary crisis – idle cranes on early-stage construction sites, a steep fall in formerly boated property prices, a collapse in car sales, rising unemployment, falling inflation – which have imposed real pain on many families and individuals. The statistics indicate negative growth in the first quarter of 2009 and only optimists think 2009 will produce 1-2 per cent GDP growth overall – and that hinges on a global recovery in demand for the commodities, which make up more than 80 per cent of the country’s exports.

But 2010 and beyond should be a different story. Next year Kazakhstan’s international profile will rise as it becomes the first post-Soviet state to chair the Organization for Security and Co-Operation in Europe, which was set up to promote democratic development and economic and political co-operation between countries formerly divided by the Cold War. At the same time, China, Kazakhstan’s populous, resource- and energy-hungry but capital-rich neighbor, should be back on its long-term path of rapid economic development, and taking advantage of new pipelines and road and rail links connecting China and Kazakhstan and other Central Asian resources.

This reflects the key fact that throughout this tough recession the big international oil companies have continued to invest billions of dollars in world-size oil and gas fields in the west of the country, such as Karachaganak, Tengiz and Kashagan, while China has pushed ahead with a 3,000 km gas pipeline to carry Turkmen and Uzbek gas through southern kazakhstan to western China. At the end of 2012 the offshore Kashagan oil field is scheduled to come on stream and oil production and revenues will virtually double as production builds up to 1.5 million barrels a day from the new field.

Kazakh gas will also flow east to China when the new export line reaches full capacity of 30 billion cubic meters over the next few years, while construction companies are also building new oil and gas pipelines south and west to Europe via Azerbaijan, Georgia and Turkey. At the same time, Kazakhstan is poised to become the world’s largest miner and exporter of uranium for nuclear power stations as Kazatomprom powers ahead with operative investments with foreign companies in nes mines and processing plants.

With finance from China as well as the World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and others, Kazakhstan is also gearing up to build a new motorway linking China and Europe. Heavy investment  in new rail links, powerful diesel locomotives from a GE locomotive plant in Astana and new oil and gas export facilities at the ports of Aktau and Kuryk are transforming the basic economic infrastructure and preparing for decades of future growth. The last two years have been tough, but the have not been wasted.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 18-20

↑ Top