IMF Survey: Kazakhstan on Road to Recovery, But Banking System Still Weak

IMF News, August 17, 2010

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The IMF projects that the economy will grow by 4 percent in 2010, mainly driven by higher exports, increasing commodity prices, and foreign direct investment.
The oil sector accounts for one-fourth of GDP, 60 percent of total exports, and 40 percent of total budget revenues.
Major foreign investment helped fuel strong GDP growth between 2000 and 2007, averaging about 10 percent a year.
Exports fell from $76.4 billion in 2008 to $48.2 billion in 2009.

Nonperforming loans on a 90-day overdue basis have risen to 26 percent of total loans—up from 3½ percent in mid-2008.
Kazakhstani banks amassed external debt amounting to roughly 44 percent of GDP prior to the crisis.
Credit growth stalled when capital inflows stopped; property prices slumped; currency-induced credit exposure and increased uncertainty led to significant banking difficulties.
Four Kazakhstani banks were forced to restructure their external obligations.

Authorities used savings in the National Oil Fund to help stabilize banks.
Government actions included taking equity stakes in four large distressed banks, transferring deposits from public entities into troubled banks, and providing preferential funding to sectors with concentrated nonperforming loans (mainly real estate and construction).
Public debt was less than 20 percent of GDP, enabling fiscal measures that increased budgetary outlays for pensions, public sector wages, and social benefits.
Monetary policy in 2009 was supportive with low interest rates and easy access to liquidity, improving bank liquidity.
The tenge was devalued by 20 percent in early 2009 to ease pressures on reserves and restore competitiveness with Russia.

Comprehensive and transparent resolution of nonperforming loans is urgent; accompany this with a full assessment of recapitalization needs for systemically important banks.
Strengthen the macroprudential, regulatory, and supervisory frameworks to address vulnerabilities such as excessive reliance on foreign funding and risky lending practices.
Restore banking system health should take precedence over promoting credit growth through directed lending policies where there is a difficult trade-off.
Fiscal consolidation should be based on increased savings of oil revenue; government support for troubled banks and stimulus spending should be withdrawn gradually and be part of a medium-term fiscal consolidation plan focused on maintaining the quality of public spending and increasing savings of oil revenues for future generations and in case of future shocks.
Develop domestic financial markets to discourage dollarization: strengthen domestic deposits, deepen domestic money markets, promote long-term liquidity in the domestic currency, and foster good risk management practices.

Authorities plan to reduce dependency on oil and advance diversification by improving the business environment, modernizing enterprises, creating new high value-added export-oriented sectors, and supporting industries such as telecommunications and transport.
The government’s development strategy for the next decade provides a strong basis for gradual diversification, but its success hinges on a well-capitalized and well-regulated financial system.

IMF Survey online — August 17, 2010