30 september 2020

Central Asia news

NG: Rating of Kazakhstan is negative

15.04.2008 00:52 msk

Nezavisimaya Gazeta

Analytics Kazakhstan

Kazakhstan is the only CIS country with a long-term development strategy (until 2030). It aims at becoming a member of the World Trade Organization and one of the 50 best competitive economies in the world. Even Russia emulates the Kazakh experience every now and then. It founded the so called Stabilization Trust only when its analog in Kazakhstan proved its worth. The Kazakh leadership called it a guarantee from all sorts of nasty economic surprises.

The problems Kazakhstan is encountering compel its leaders to recall the money stashed away against the rainy day. Analysts of the Risk Evaluation Group predict "mounting social tension in Kazakhstan in 2008 due to food price-rise and prices of tenements practically nobody can afford."

This state of affairs is attributed to the bank crisis last summer fomented by the international financial crisis. This latter in its turn had been caused by nonpayment of mortgage credits in the United States.

"In summer 2007, Kazakh banks encountered liquidity squeeze in the domestic and foreign markets. Investors' interest in local banks went down despite the high rate of the Kazakh bank system development and stable macroeconomic situation. The country remains a developing market, you know. The Asian financial crisis a decade ago plainly shows that it is the developing markets that get affected first and foremost when foreign investors become more conservative," to quote Dosym Satpayev, Risk Evaluation Group Director and advisor to the Eurasian Banker Club.

Kazakhstan is bound to encounter trouble with loan refunding soon. Kazakh banks will need $3 billion every three months in the next twelve months, and syndicated loans will amount to 70% of all financial commitments to be refunded. Kazakh banks are expected to pay foreign creditors $10-12 billion in 2008 alone. Aggregate debts of Kazakh banks in the meantime amount to nearly $80 billion. Banks are bound to accumulate finances and transact them to foreign creditors, and that will have a negative effect on domestic credit activities. As a result, Kazakh banks will have to stiffen loaning terms domestically. According to Satpayev, it may have a negative effect on the economic development rate and jeopardize state programs (including support of small and medium businesses).

The Kazakh construction market is badly affected already. Banks no longer urge the population to get real estate loans and buy apartments "right now". Lacking foreign capitals as sustenance, credit activity went down. Foreign countries deny Kazakhstan assistance and offer loans at a high interest rate. Kazakh banks followed suit, pinning the blame on foreign financial institutions. Even real estate loans at 10% the annual interest (the state program) are more than what doctors, teachers, and young families can afford because of their low income.

Large Kazakh cities including Astana and Alma-Ata are territories of "dead" construction sites where no work is being done. Thousands have found themselves unemployed. Prices in the real estate market went down 25-40%, depending on type of buildings and their locations. Construction companies that actively loaned money from banks only recently are in a state of collapse these days.

"Crisis in the sector of construction is undeniably a corollary of the post-bank crisis," Aleksei Malashenko of the Moscow Carnegie Center said. On the other hand, the expert does not rule out the possibility that what is happening in this sector of economy in Kazakhstan is a process of banal redistribution of the market, fomented artificially and deliberately. To a certain degree, this state of affairs will simply facilitate the process of natural selection so that only the best will survive. Moreover, the companies deserted by their banks will be compelled to sell construction sites and buildings there whose construction was never completed at a discount. "It will leave only major companies in the market, the ones associated with the state," Malashenko said. Needless to say, this state of affairs has already affected the people who invested their own savings in construction of tenements. Construction suspended, these people are left without the coveted apartments and without money. They pool efforts already, protesting and demanding what is due them. Some experts say that nearly 2.5 people depend on the construction market for their income. Negative consequences of the construction collapse will keep mounting and put into motion the so called domino effect. Construction companies fire personnel en masse. The number of real estate agencies is down. Unemployment in the country is growing, reducing the purchasing capacity in the process. All of that is having a negative effect on the market of services.

Kazakh banks meanwhile will have to concentrate on the domestic market now, and this trend will make struggle for domestic resources vicious indeed. The deposit rate is already going up. Drain of capitals from the country and devaluation of the national monetary unit push the problem of inflation into the foreground again... All these trends cannot help affecting the rating of Kazakhstan itself and its major banks and companies, the so called blue chips. The forecasts went down from "positive" to "stable" to "negative". International rating agencies suspect that the process may continue. The Kazakh authorities' pet goal of making the top 50 best competitive economies remains far beyond reach.

Trying to ameliorate the situation somehow, the government provided $4 billion last year to finance construction companies, small and medium businesses, and state programs. All these measures are not particularly effective, and the government will probably have to come up with additional funding again this year. Anvar Saidenov of the National Bank admitted that the economic development rate this year was expected to slow down to 5-7% - the lowest rate in the last six years.

On the other hand, the government promises to keep the inflation to no more than 10% even though some local experts claim that it reached 15% by late 2007. Satpayev believes that political consequences of the slowing down economic development this year will be grave indeed. The inflation rate will first and foremost affect the strata of the population that has been actively supporting the existing socioeconomic and political system i.e. the new middle class (employees of the rapidly growing sphere of services, that is), small-time businessmen, and residents of major cities in general. The middle class amounts to between 15% and 25% of the population only, but the default will badly affect financial standing of the majority of the Kazakhs.

"The way it usually happens, the state will need a scapegoat or two... someone to pin the blame on," Satpayev said. It seems that the Kazakh state has already found scapegoats. All blame is to be pinned on banks. "Last August, the Risk Evaluation Group conducted a study "Sociopolitical consequences of an economic crisis". As it turned out later, some conclusions drawn in the course of the study were confirmed by the president's annual message afterwards. The matter concerns the assumption that financial and economic problems in Kazakhstan might become a hard blow at banks. Determined to remain in control, the authorities might shift the blame on local business structures and falsely accuse them of provoking crises deliberately. It is the banking sector that we suspected would be the first target. As they say, "victory has many fathers but defeat is always an orphan". Where Kazakhstan is concerned, the head of state is always victorious while all the rest find themselves defeated again and again," Satpayev said.

The parliament of Kazakhstan demanded explanations from the government concerning the measures this latter intended to take to rectify the financial situation. Lawmakers decided that the state program of tenement construction was in jeopardy because real estate loans were the only means of buying the so called affordable apartments. According to the National Agency, salaries in Alma-Ata average $700 when a square meter of an apartment costs $1,350-1,500 in Astana and twice as much in Alma-Ata. Satpayev suspects that extractive companies will become the next scapegoats now. Mostly controlled by foreigners, they are ideal for the part of public enemies.

Source: Nezavisimaya Gazeta, No 77, April 14, 2008, p. 16. © Translated by Ferghana.Ru