Interview: The American Crisis Has Exposed Our Vulnerability

The reason for the increase in the prices of goods and services in Kazakhstan is threefold. First, after the [parliamentary] election, the authorities freed artificially low prices; second, the impact of the global events [subprime crisis in the United States]; and third, the absence of competition [in Kazakhstan]. This, at least, is the view of Kazakh economist Oraz Zhandosov.

The whole interview in Russian can be found here.

What does the downgrade of Kazakhstan’s sovereign rating mean?

Yes, indeed, for the first time in eight years, Kazakhstan’s rating has been lowered by one grade. But it still remains investment grade. The downgrade itself will not greatly affect the country’s economy. At the same time, however, the construction sector and the population will not be able to obtain credit as easily as before. And this will affect the dynamics of the GDP growth, and in the fourth quarter [of 2007] we will already see a slowdown compared with the previous quarters.

Ideally, [sovereign] ratings, as the agencies themselves state, should be based on future trends. They are prepared for investors planning to buy (or sell) sovereign bonds. In the case of Kazakhstan, however, the change in rating did not have a forecasting but rather a catching-up character. Indeed, today’s “crisis” did not come out of nowhere. Its deep cause lies in the credit boom which triggered the massive growth in construction and mortgages credit. When you use the word “boom”, it means growth that, to a certain extent, is not based on a solid foundation that should be the basis of a healthy growth process. And this is the fundamental cause. What happened on the American credit markets which virtually ended foreign financing for Kazakh banks just showed the vulnerability [of the system]. If the aggregate external borrowing of the banks amounted to, say, $5 billion, the consequences of the American mortgage crisis in Kazakhstan would be negligible, and there would be no macroeconomic effects for the country. Currently, however, the Kazakh banks have borrowed about $45 billion in foreign loans, and most of those funds were directed at lending within the country.

Should the National Bank help in this situation and allocate money from the budget?

Trying to save everyone is wrong because it undermines the basic foundations of the free market and private property, according to which there will always be risks and there will always be losers. Otherwise, it would be a planned economy and socialism. The government, in this case, should be guided by two principles. First, it should protect small depositors for they are essentially retail investors. The fact that the government did not set up an adequate protection for depositors is clearly the fault of the government. Therefore, the government should take the interests of this group of population into account first when making decisions about whether to intervene and how. Second, prevent any formation of a systemic distrust in the Kazakh banking system. Otherwise, the consequences will be serious, and it will no longer talk about the slowdown of the GDP growth but about its fall.

I would like to add that the real size of the current crisis is difficult to assess at this point because there is no public access to constructive information about the volumes of residential construction, the amount of speculative buyers and other important factors. I hope that at this time the government is somehow collecting these data.

Can the wave of rising prices of food and services be attributed to market fluctuations? Or should we admit that Kazakhstan is facing a systemic economic crisis?

There are several different reasons for this rise in prices. The first is that for some time the prices were kept artificially low because there were a number of different elections held in the country. Now, when it is clear that the authority firmly established itself, the price were quickly released. The question arises: did the government act appropriately to release all prices immediately, or should it have been done gradually? I am a supporter of the fact that all necessary steps need to take place simultaneously. But before taking such a step, the government should have foreseen the costs and should have budgeted for them. The government agencies are able to perform this method of calculation — it is, in principle, quite simple. And there is money in the budget…

Who got hurt the most, and here in nothing new in that, were state employees and pensioners. It is just not supposed to be that the salaries of teachers and doctors are below average in the country. If the wages of state employees were around 50 thousand tenge [a month], and pensions around 30 thousand tenge [a month], all the price fluctuations would be easier to digest. Once again, I repeat: there is money in the budget. Rather than spending billions of dollars on the construction of Astana and on capitalization increase of development institutions, all these social issues could have been solved a long time ago. Higher prices in the world markets are not an excuse — and the consequent increase in the prices of goods within the country could have been predicted to take appropriate and timely measures. Then, the reaction of the population would not be so painful.

The third source of problems is the lack of competition. The root of the problem is that the government does not prevent monopolies of some companies and does not encourage competition. As a matter of fact, for four years the government has not established an independent regulatory agency to safeguard competition — one that would have effective, legally enshrined authority and have professional experts in its ranks, such as the AFC [the financial regulatory body].

Should the government leave the production of strategic goods to state monopolies?

I believe that we can not sit on two chairs. The government is now trying to regulate the price of bread and requires the akimats [regional authorities] to create stabilization funds. How can the akims fo that? They are not the ones growing wheat. That means they will have to buy it. At the same time, stabilization funds imply the existence of a certain amount of grain at prices below market. And when akimats go to the entrepreneurs to get grain, then some of those entrepreneurs who enjoy the akimats favors will not be touched. Others, however, who for some reason will not enjoy those good relations, may be forced to sell their grain to the akimat stabilization funds for prices below market value. This way, a system will be created full of arbitrary administration and corruption. And —nobody will be able to check how much grain the akimat actually purchased. For example, if the stabilization fund is to have 20 thousand tons and the akimat purchased 30 thousand tons, the difference can then be sold by the akimat at market prices.

A separate issue is the prodkorporatsiya. This government body was created in 1995 with fairly narrowly defined goals - to organizing storage and be in charge of the strategic grain reserve. The fact is, however, that the corporation, whose head it the minister’s friend, started to take upon itself new tasks. Thus, a few years ago prodkorporatsiya began commercial purchasing of grain. Is that really necessary or not? What is its impact? Nobody knows. If you impose government regulation, it must be done completely. One kind of regulation is a state monopoly. In that case the prodkorporatsiya needs to be turned into the Foodstuff Ministry which will build up the necessary grain reserve for the entire country and will require all producers to sell 20 percent of their harvest at fixed prices. Then this will be sent to grain mills and bakeries. But I think this is silly — as a result of income from oil and gas, our government has sufficient resources to help all citizens who are in serious need.

The government admitted that inflation will exceed the planned target. What is the cause of the rampant inflation and why was the National Bank unable to predict it?

When the economy grows at 10 percent a year — and we will not even talk about the quality of this growth — it is difficult to keep inflation at a low level. With this kind of growth in our type of economy, the optimal inflation rate is around 6-7 percent. And to deceive ourselves and hope that it could be less is not realistic. The primary responsibility of the National Bank is to determine what rate of growth in money supply and credit to population and the whole economy are permissible. It is a complicated issue. Even disregarding the now infamous “crisis” in mortgage lending and construction, I say: get the National Bank the task to limit the growth of retail credit to a maximum of 20 percent a year. The Bank could accomplish this goal with the monetary instruments it uses. For the Bank, it is just a technical task. But who will assign the National Bank with this task?

Our population is poor, but we sit on a huge reserve of oil — therefore, the collateral base of the country is quite significant. The banking system is relatively well developed, and it can be trusted as a facilitator of the loan. These two factors enabled people to buy what they previously could not afford: apartments, cars, household appliances. Perhaps, it would be worthwhile for the president to cap the credit growth at 20 percent. But he cannot do that — people would not support it because they don’t want to be denied the opportunity to shop. Of course, if the National Bank was completely independent and it would be interested in nothing other than inflation, it would be able to slow down the credit growth and inflation would be in the desired corridor of 6-7 percent. However, given the structure of real power in such matters, the National Bank alone cannot solve these issues.