Kazakhstan hit hard by shortage of liquidity
By Joanna Chung and Stacy-Marie Ishmael
Published: October 9 2007 21:04 | Last updated: October 9 2007 21:04
At a recent gathering of bankers in Almaty, Kazakhstan’s financial capital, Dmitry Shishkin, an analyst from Standard Bank, noted the efforts being made to play down the problems in the country’s banking sector.
“Much time was spent debating whether the current situation should be called ‘a crisis’ at all,” he says.
But the fact that Kazakhstan’s banks are embroiled in the global financial turmoil is becoming less deniable by the day.
The banks have borrowed frenetically from the international capital markets in recent years. Moody’s Investors Service estimates that the present total of Kazakh banks’ international borrowing is about $40bn – or more than half of their total non-equity funding.
The problems have spread beyond the banks. On Monday, Standard & Poor’s became the first rating agency to slash Kazakhstan’s sovereign credit to the lowest investment grade category, warning that the banks might struggle to raise new debt or refinance their existing foreign loans.
The agency expects economic growth to slow sharply and for asset quality concerns to emerge in many banks.
There are also significant ramifications beyond Kazakhstan, which are only now becoming clear. While Kazakhstan is a relatively small economy – the size of New Zealand or the US state of Mississippi, for instance – it has occupied a key part of many emerging-market investment portfolios.
Helped by plentiful international liquidity, the promise of fast growth in the oil-rich economy, investor demand and strong credit ratings, Kazakhstan’s banks have been among the most prolific issuers of emerging-market debt during the past six years.
Analysts say yield-hungry emerging-market investors have almost indiscriminately scooped up both bank bonds and loans. “Kazakh banks offered yield that emerging market investors loved,” says Charles Robertson, economist at ING.
“All emerging market debt funds will have either been offered or now hold a significant amount of Kazakh eurobonds. It is certainly an issue.”
Indeed, overseas investors have fuelled the break-neck growth of the Kazakh banking sector. ING estimates that on an annualised basis, the sector has grown 100 per cent a year in the past six years. Total assets of the system increased 5.5 times to 11,205bn tenge ($92.6bn), or nearly 90 per cent of gross domestic product.
Moreover, Kazakh banks are more dependent on foreign borrowing than banks in most other former Soviet states. For instance, the Azerbaijani and Belarusian banking sectors’ growth have been funded mainly by customer deposits, according to Moody’s. Ukrainian bank debts are structured so that there are no significant repayments falling due by the end of this year or in 2008.
Russian banks have come under severe pressure recently but state-controlled banks account for 71 per cent of the banking system’s external debt, the agency says.
Mr Shishkin of Standard Bank says: “Unlike Russian banks which can turn to local bond issuance for funding, the local market in Kazakhstan is not sufficiently developed.”
So Kazakh banks have been hit hardest by the liquidity shortage since August. During August and September, they did not issue a single eurobond. The country’s banks have taken 1,300bn tenge of short-term funding from the National Bank of Kazakhstan to support their liquidity – or three quarters of the nation’s monetary base – since July, S&P says.
In recent weeks, Kazakh banks’ bonds and shares have experienced wild swings. Credit derivatives have been extremely volatile. Five-year credit default swaps – a type of insurance against default – on the sovereign credit and the individual banks have soared. For instance, the CDS of Alliance Bank, one of the top six banks, which was 406bp in June, reached 996bp late last week, according to Markit.
Meanwhile, shares of leading Kazakh banks listed in London have fallen sharply. Some bonds recently traded at yields of up to 20 per cent – distress levels – before falling again to 13 per cent, according to Okan Akin, corporate credit strategist at Bear Stearns. “No one was expecting financing for Kazakh banks to completely shut down,” he says.
Continued reassurances by the National Bank of Kazakhstan appear to be assuaging worries, at least for now, analysts say. There is also a belief among many investors that the government will not let the banks fail, given their importance to the economy. Moreover, some analysts point out that the proportion of banks’ foreign obligations maturing in the next two years is relatively small.
However, some observers think the situation in Kazakhstan may get worse before it gets better, particularly with the potential for a sharp downturn in the country’s property market, to which the banks are heavily exposed.
Mr Shishkin says that about 70 per cent of local banks’ loans are directly or indirectly connected to the real estate sector, compared with about 25 per cent in Russia.
Kazakhstan’s troubles raise concerns about some other emerging-market economies that have experienced rapid credit growth. “The problems in the Kazakh financial markets are a symptom of the global credit crunch spreading to countries which are highly leveraged and have weak financial institutions,” says Lars Rasmussen, analyst at Danske Bank. He adds that the Baltic countries of Latvia, Estonia and Lithuania as well as Romania and Hungary are also showing signs of pressure.
Copyright The Financial Times Limited 2007