The analysis of development of banks’ investment portfolio in period of financial crisis

The financialcrisis in Kazakhstan is caused by a number of factors, including the growth of inflation. According to official data, in May 2013 the inflation in the republic was 19%, while non-official sources report 40%. The reasons which have caused inflation during the last two years, were: growth of import while the labor efficiency growth rate slowed down; the rise of average contract prices for imported goods; relatively high total inner demand; growth of payments to non-residents; decrease in foreign capital inflow as a result of global crisis of liquidity; price shock at international food markets etc.

Today one can witness the increase of overdue debts of the population of Kazakhstan. According to B.Baishev, the debt will continue growing. We have conducted some studies. If the sum of the credit is $100 000, with the annual interest rate 18%, within 25 years the sum to be paid will reach $355000. Just imagine how 60-70% incomes of an individual from so called middle class will be paid out to cover the credit. Such are real conditions, which the banking system has created for the people”. Along with this, as deputy chairman of Executive Committee of the Association of Banks of Kazakhstan puts it, on May 2013 the deposits of individuals totaled $12 billion. In other words, the Kazakh banks will have to annul all deposits of the people in order to pay out foreign debts.

But this is not all. The shares of majority of Kazakh companies at foreign exchanges last September showed catastrophic decline while the financialcrisis soared. Thus, the rates of GDR Zhaikmunai LP, a mother structure of oil company Zhaikmunai, declined at London Exchange to 26,67%. The rates of Kazakmus PLC holding which have united assets in color metallurgy, energy and oil industry, went down to 21,85%. The shares of Eurasian Natural Resources Corporation PLC went down to 19,14%, GDR “Alliance bank” and Bank Astana Finance, one of the largest in the country, - to 16,58%.

The same thing is taking place in inner markets. According to vice-president of Kazakhstan Stock Exchange (KASE) A.Tsalyuk, “the Kazakh Stock market will continue long dramatic declining”. He said “by now the decline is over 35%”. This is a very substantial decline even for our market. But this is not yet the bottom of the market”.

Thus, the second half of 2013 started unluckily for the Stock market of Kazakhstan. From the first dates of July the index of Kazakhstan Stock Market started going down and by 15 September it reached 1709,72, the lowest from August 2011, although in late February it was 2876.

From July the market price of companies, listed in government list of KASE, dropped to 44,4% down to $52,7 billion. The most capitalized companies at Kazakh Stock exchange such as ENRC, RD KazMunaiGaz, Kazcommertsbank, BTA Bank have lost 39-50% in price since early July.The volume of trade soared as well. Within 8 months of 2013 the volume of shares transactions (buy-sell) at KASE and at special trade platform of regional financial center of Almaty was $2,6 billion (314,0 billion tenge), that is lower than the same period of the previous year for 2,77 billion USD (345,9 billion tenge) or 2,1 fold.

Kazakhstan is experiencing one of the deepest declines during its history. The officials of RK are reasoning this with the “world crisis”.

This became possible as a result of selling out the national treasures at low prices and involving the citizens in various financial and banking tricks at international scale under the slogan of economic modernization and building market economy.

Today all immovable property of Kazakhstan, pledged by banks, cost about 40 billion USD. This is not a big sum at world scale. In fact the economy of Kazakhstan can be bought for $50 billion. In fact the only winners in this situation are investors, who are ready to make long-term investments. Further drop of prices at Almaty Stock exchange can seriously aggravate economic crisis. And the “economic 11 September”, which was caused by the refusal of the US Congress to allocate $700 billion, may not only bring to bankruptcy of Kazakh banks and their acquisition by foreigners, what is happening already, but also to sovereign default of RK as it was in Russia in 1998.

The Chairman of the Commodity Producers Association of Almaty S.Turzhanov says, that “the situation in Almaty and Astana is being thoroughly studied by representatives of Middle East, Sought-East Asia and Russia. They are looking for something to purchase. And if they used to ask in the past for the permission to do business at 10%, now, being aware of the lack of money and that foreigners will not give the money just for the hell of it, they are now hinting at 25%, and 40 to 50% at average. His opinion is shared by vice-president of Kazakh Federation of Immovable Property, deputy chairman of the Board of Kazakh Association of Evaluators A.Kalinin.

In summer 2012, the American subprime crisis had an impact on the Kazakhstani real estate market, and then, in 2013, on its entire banking sector, which after Russia’s is the most developed in the CIS. This sector is facing major difficulties owing to its massive lending sprees in international financial markets and its overexposure to the real estate sector. For the first time since the Russian crash in summer 1998, Kazakhstani authorities are faced with managing a major shock, compelling them to test, in real time, not only the solidity of the country’s most dynamic economic sectors, but also the effectiveness of the state intervention mechanisms. Astana ultimately seems to have demonstrated its overall financial solidity, but the long-term social and regional costs remain unclear.

Boosted by great petrol reserves and looking for quick ways to make a profit, Kazakhstani banks borrowed significant sums of money from U.S. banks involved in hedge funds. Today, they are paying the price for their success and face two principal problems. First, the weighty role played by the construction sector in their development (which, for example, constitutes 45% of the Alliance Bank’s loan portfolio), and, second, their massive foreign borrowings, which amount to more than 50% of their total borrowings, as compared, for example, with the 18% borrowed by Russian banks. During 2011 alone, Kazakhstani banks obtained more than US$18 billion in international credits. Today, the servicing of Kazakhstan’s foreign debt that will have to be repaid by 2014, has reached a level equivalent to 42% of its exports. In 2012, the country had a bill of US$4 billion to pay, tripling brutally to 12 billion as a result of the crisis. Kazakhstani banks, for their part, hold US$40 billion worth of foreign loans, a significant share of which now has to be refinanced at very high rates.

Nevertheless, the Kazakhstani authorities quickly stepped in to regulate and stabilize the situation. In spring 2012, Kazakhstan’s Central Bank set up an aid fund for small banks with insolvency problems. When Standard & Poor’s and Moody’s Investors Services downgraded the credit ratings of Kazakhstani banks, the state decided to invest US$11 billion of emergency money (nearly a quarter of the Central Bank’s reserves) in order to halt foreign borrowings and avoid a credit ratings collapse. Astana also set up a Stabilization Fund of US$4 billion to ensure liquidity, but this did not suffice to reassure foreign investors, especially when the Renaissance Capital’s Rencasia Index for Central Asia, which is dominated by Kazakh equities, collapsed in September 2013 after Lehman Brothers’ announced its bankruptcy.

In October, Astana announced it would give US$5 billion in aid to the major national banks for about a quarter of their shares (the state already directly or indirectly controls a third of corporate deposits). Thus, the BTA Bank, the largest in the country, is expecting a state injection of more than US$2 billion, while Kazkommertsbank, the country’s second largest, is awaiting a boost of US$300 million, and the Halyk and Alliance Banks US$500 million each. Bank Astana Finance was the most affected because of its high-level involvement in the construction sector, but it was the collapse of the Alliance Bank that caused the most ink to be spilled. After becoming the leading retail lender and the fastest growing banking institution in Kazakhstan in only a few years, the Alliance Bank spectacularly collapsed; in the first semester of 2013, its net income fell by almost half. In the short term, this situation is going to facilitate foreign banks to establish themselves in the Kazakhstani market, as their share had previously been a modest 15 percent. Now, for example, Italian UniCredit, South Korean Kookmin, Israeli Hapoalim, Abu Dhabi-based private equity fund Alnair Capital, and the London-based HSBC, all have their sights set on snapping up sections of Kazakhstani banks. Moreover, Raiffeisen International and the Bank of Tokyo Mitsubishi are planning to open offices in Almaty in the first half of 2014, the second to facilitate Japanese firms’ entry into the Kazakhstani raw materials market.

This crisis has multiple implications. It caused major liquidities shortages for the country. Attaining record levels of 18 percent in 2012, inflation has continued to climb in 2013 to around 20 percent, and the tenge’s stability remains fragile.

On the societal level, the crisis not only affects the population of Kazakhstan, but that of the entirety of Central Asia. Over recent years, Kazakhstan has become the economic motor of the whole region. It is particularly important for Kyrgyzstan, since, with trade levels reaching nearly 450 million dollars in 2012, it rivals Russia and China as the country’s largest trading partner. Moreover, Kazakhstan is establishing itself more firmly in Tajikistan, continues to be one of Tashkent’s most important partners (for example, in cereals), and Kazakhstani-Turkmen cooperation in the domains of hydrocarbons and uranium extraction is certain to develop in coming years. Any collapse of Kazakhstani investments in the region, especially via bilateral Investment Funds (Kazakh-Kyrgyz and Kazakh-Tajik), would be detrimental to the whole region, even more so at the present moment when Bishkek and Dushanbe both face huge energy shortages and the latter significant deficits of foodstuffs. In addition, Kazakhstan has an indirect influence on its neighboring economies, since, after Russia, it is the second most favored destination for Kyrgyz and Uzbek migrants. Since the beginning of winter 2013, construction sector workers, mainly Central Asian immigrants, have not received any or only substantially reduced proportions of their salaries. As a result, they can either no longer send remittances home or are compelled to return to their countries without the hoped-for money, which has all of a sudden deprived hundreds of thousands of families of revenue at the onset of winter.

In the end, this crisis may come to have positive consequences. It will streamline the Kazakhstan banking sector by getting rid of those companies that placed all their bets on speculation. It will also act as a corrective to the over-evaluation of real estate and encourage investment in more productive sectors. The crisis has demonstrated that the country’s overall financial basis is solid enough to enable Astana to contain a market collapse. Kazakhstan’s central bank still has about US$20 billion in reserves and the country’s oil fund stands at about USS$15 billion. Nevertheless, the long-term social impact remains unclear, and were the “Kazakhstani model” to fail as a result of this crisis, it would have a detrimental impact on the rest of Central Asia.

Date: 2015-12-11; view: 811