Of the "newly independent states" of the former Soviet Union, Kazakhstan continues to lead the economic recovery from the continuing global financial crisis, based in part on an innovative approach to financial restructuring of the banking sector that statutorily limits the prerogatives of creditors.
The National Bank of Kazakhstan (NBK) will widen the exchange-rate corridor this month to 125-165 tenge per US dollar, according to chairman Grigorii Marchenko, moving towards a "controlled float" system in which the currency is allowed to fluctuate within a rather wide band with only occasional intervention by the central bank. This was foreseen on this site last year (see Kazakhstan's tenge far from secure12 February 2009).
A recent Citi research note foresees a 3% tenge appreciation in the next few months and a 5-10% appreciation during the course of the current calendar year, bringing the rate eventually close to 140 to the dollar. The NBK has to date bought about US$6 billion since November to forestall the tenge's appreciation.
Foreseeing low inflation in Kazakhstan over the near term, Citi reports that the NBK chairman expects fiscal policy to bear the brunt of curbing inflation, even if in practice it may be unable fully to do so.
On the banking front, a presidential decree published this month ("Conception of the Development of the Financial Sector of the Republic of Kazakhstan in the Post-crisis Period"). extends the country's earlier innovative approach. In view of "the negative experience of the dependence of Kazakhstan's financial sector on foreign loans", the financial sector is to be given the task of mobilizing domestic resources as well as the means, assisted by the state, for "the attraction of domestic sources of financing", according to the decree.
Two major banks—BTA Bank, the country's biggest lender; and Alliance Bank, the fourth-largest—defaulted on foreign obligations last April and May after having been taken over by the state in an effort to stabilize the wobbling banking sector.
Most remarkably, the new presidential decree observes the international experience of the "ineffectiveness of establishing specialized banking sectors … need[ing] permanent state assistance" and instead foresees "a system of … institutions of investment banking" benefiting from increased state regulation according to international standards following countercyclical strategies.
In the "post-crisis" period, this means, among other things, seeking to increase competition in the financial sector and in the first place among banking institutions. The sections of the decree on the implementation of enhanced regulation are, however, among the sketchiest in the document.
While the highly programmatic nature of this decree gives it the style of an inventory of all financial instruments that could possibly be developed (it runs the gamut from microcredit to reinsurance), some are clearly more likely in the near term than others.
Thus, while Kazakhstan's domestic interests will explicitly govern the extension "on a consolidated basis" of state planning and stimulation of the economy (always respecting "the principles of the free market system"), this "consolidated basis" foresees attracting domestic institutional investors to participate in "state-private partnerships" financed by state-guaranteed bonds.
Pension fund investment in infrastructure projects is specifically mentioned and given the highest profile. Bank deposits of individuals and corporations are also cited as sources of financing, as well as the development of real estate investment trusts and similar vehicles. The list of possible instruments extends even to prime brokerage (ie, bundled services offered by investment banks to hedge funds) and "Islamic financing" (which category, however, is given no content).
It is accordingly expected that credit growth will become a main instrument of monetary policy to influence the exchange rate. However, the NBK itself says that strengthening the state regulation of the banking sector, which for Kazakhstan means increasing the quality at least as much as the quantity of regulation, may, contradictorily, limit the extension of credit in the economy.
It is in this context that we should read the Wall Street Journal's report this week of the NBK statement, based on its own survey of the country's commercial banks, that bad loans remain the main systemic risk. Further down in the NBK's survey, one reads that the absolute quantity of such bad loans has in fact stabilized.
The Citi research note foresees a stronger-than-expected balance of payments, thanks to stronger-than-expected performances in the mining, agricultural and manufacturing sectors - on which basis the tenge will moderately appreciate in the near future.
The 2010 budget will therefore support recovery in domestic consumption, with socially oriented expenditure representing over 40% of the total. The recovery in Kazakhstan will be driven by increases in public as well as private consumption and also restocking of inventories. All this is backstopped by the global recovery of commodity prices in recent months.
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First published in Asia Times Online, 12 February 2010.