How Deep Is the Credit Crisis in Kazakhstan?

analysis

How Deep Is the Credit Crisis in Kazakhstan?

By SRI ⋅ October 15, 2007 ⋅

Kazakhstan is facing two major problems:

1) Large external short-term debt that the banks hold on their books and the upcoming refinancing of this debt (while facing an increased cost of new borrowing abroad).
2) Massive lending to construction companies and issuance of mortgages to general population (and the growing risk of default due to possible decline in the value of housing as collateral and the inability of people to pay the high rates of previously obtained loans).

To solve the first problem, the banks will be forced to (since the cost of external borrowing is not likely to decrease): (a) refinance their debt abroad at higher rates, (b) increase the cost of credit in the domestic market (raise their interest income), (c) raise tariffs on banking transactions (increase their non-interest income), (d) increase their capital (attract new shareholders’ capital), (e) reduce operating costs, (f) sell non-core assets (g) buy foreign currency in large volumes on the domestic market to repay external debts (which may cause the tenge to devalue).

This will lead the banks to “tighten their belts”, and people and businesses will see the bank lending becoming more expensive. That by itself would not be a crisis. There will be a crisis, however, if a second problem will not be resolved: the sharp decline in property values and the deterioration of the loan portfolio of banks. Then the scenario could be similar to the subprime crisis in the USA — a sharp increase in defaults on mortgages, declining value of the banks’ assets, and new risks to financial stability of banks that are least diversified and most exposed to mortgage and retail banking.

From what we know, it seems that Kazakh banks will be able to weather the current crisis. The government (including Kazakh president Nursultan Nazarbayev) and the Kazakh National Bank have stepped in and made it clear that they will support the banks and will provide necessary liquidity if needed. The question, however, is whether the crisis is only concentrated in the banking sector. The Kazakh government would undoubtedly be able to rescue the banks if they were the only sector of the economy affected by the crisis and if the crisis only involved a sudden cut-off of foreign credit. If the disease is spread among the entire economy, though, it can prove too much to handle even for this energy-rich petro-state. And there are growing signs that other sectors are affected as well — the construction sector has been hit hard by the sudden draught of liquidity, the inflation has been running wild in the last few months, and the government even had to intervene to keep the prices of foods from rising. These symptoms may simply be the result of the banking crisis and overall uncertainty over what its consequences will be and may take care of themselves as soon as the government and the financial authorities bring the liquidity draught under control. However, should they be indicative of larger imbalances in the Kazakh economy, it could become much harder for the government to put together a bail-out plan not just for Kazakhstan’s banking system but also for the entire economy.