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China deal helps out Kazakhs

The US$10 billion deal this month allowing China National Petroleum Corporation (CNPC) to purchase 50% of Kazakhstan's privately owned MangistauMunaiGaz (MMG) and a $5 billion loan from China will come as welcome boost to the Central Asian country's economy, which shrank in the first quarter after years of double-digit growth.

The economy shrank 2% in the first three months this year, after average 10% annual growth in the first seven years of this decade slowed to 3.2% last year, according to preliminary data released. Inflation in the first quarter to 2% from 2.5%.

Prime Minister Karim Masimov has made the governors of all regions in Kazakhstan "personally responsible" for ensuring "growth, however small" over the course of the first half of 2009. That could be hard going, given that the Economics Ministry forecasts a 1% decline in national gross domestic product (GDP) over the course of the year.

Still, the official opinion in the capital, Astana, is that the crisis is ameliorating, with the decline in GDP registering only 0.2% for March. Locally traded stocks are also picking up after a steep decline since late 2007. The benchmark index for the Kazakhstan Stock Exchange (KASE), which fell about 80% to 581 this past February from its historic high of 2,870 on December 21, 2007, has recovered to 868, or a 49.4% from the low. That is still within its medium-term trading range that reaches up to 997 from the low at 581. Moderate resistance between the index's current level and the top of its trading range is unlikely to be breached.

Foreign observers are less optimistic, with consensus international estimates for Kazakhstan's economic performance this year most recently revised from no-growth to a contraction of between 2% and 3%.

The government, flush with funds from the commodity boom before the present global crisis, has been spending heavily to counter the ill-effects of the collapse in growth. The state has in first 14 weeks this year spent about 20% of its national stabilization fund, the assets of which have fallen from $27.5 billion to $22 billion, according to the central bank. The State Fund for Well-being will sell the equivalent of $2.4 billion in bonds to local pension funds, and the equivalent of $4 billion in revenues from the commodity sector is expected to be spent this year and next to support the economy.

The $4 billion is apparently in addition to a previously announced $10 billion economic support package to be underwritten by the National Fund and targeted at the financial sector, the real estate market, support for small and medium-sized enterprises, businesses in the agricultural sector and infrastructure projects.

There is little chance of the government failing to come up with the necessary funds, as it has stockpiled foreign exchange (one-half in dollars and one-quarter in euros, according to reports) and gold reserves over the past decade. However, ING estimates that if the price of oil stays low, the country may not have much left afterwards.

Until recently, Kazakhstan has been able to handle things more or less on its own (see Kazakhstan does its own bailing), but the deal concluded last week between the country’s national "champion" KazMunaiGaz (KMG) and China National Petroleum Corporation (CNPC) will be welcome.

CNPC's purchase target, MMG, is Kazakhstan's fourth-biggest oil company, with reserves of about 500 million barrels and a reported output of 113,000 barrels per day. The Pavlodar oil refinery is explicitly excluded from the deal.

Of the $10 billion package involved in the deal, half will be for CNPC to buy 50% of MMG and half will be a loan from CNPC to KMG to establish the enterprise as a joint venture. This falls into the pattern of Chinese financial expansion into the world energy and primary materials industries that has been going on for some time (see China on buying and lending spree).

In addition, China's EximBank will lend $5 billion to one of Kazakhstan's state banks to help diversify the country's economy away from energy, specifically supporting development of agriculture, education, telecommunications and transport, according to the Financial Times.

This will not facilitate the task of managing the balance sheets of the banks in trouble in the country, as the central government earlier this year took controlling interests in two large lenders, BTA Bank and Alliance Bank.

Standard & Poor’s rating service earlier this year cut BTA's debt rating to default after the bank stopped making principal payments on its debt - interest payments are said to be continuing. The government is trying to arrange the sale of at least a stake in the bank to Russia's Sberbank.

According to Bloomberg, Morgan Stanley is trying to get a "credit event" declared by a 15-member industry committee so as to trigger credit-default swap payments. Meanwhile the bank is proceeding with attempts to restructure the debt.

The entire situation is rendered more difficult by the devaluation in early February of the Kazakhstani tenge from a corridor of 117-123 tenge to the US dollar to a 145-155 corridor (see Kazakhstan's tenge far from secure). If the price of oil does not increase significantly, then the chances of another devaluation over the course of the year must increase.

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URL:  http://www.robertcutler.org/blog/2009/04/china_deal_helps_out_kazakhs.html
First published in Asia Times Online, 30 April 2009.

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