Kazakhstan: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, February 8, 2017
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- Published: February 8, 2017
Context and outlook
- 2016 growth: 1 percent, driven by an increase in oil production and supportive policies (notably Nurly Zhol).
- NBK reserves increased by $2 billion in 2016 owing to strong financial inflows.
- Growth outlook:
- Projected growth in 2017: 2.5 percent.
- Projected non-oil growth by 2021: 4 percent.
- Inflation outlook: expected to fall within the NBK target band of 6 to 8 percent in 2017.
- External and medium-term risks: subdued prospects due to continued lower oil prices and weak conditions in key trading partners; uncertainty significant because of commodity price dependency.
- Policy emphasis: continue addressing external and structural conditions; reduce the nonoil deficit in the medium term with higher non-oil revenues to support sufficient social and capital spending.
Monetary and exchange rate policies
- Progress:
- Transition to inflation targeting and conduct of monetary policy including a flexible ER noted as significant progress.
- After reinstatement of the policy rate in early 2016, NBK kept short-term market rates within its corridor via open market operations, standing facilities, and NBK notes.
- After FX purchases in the first half of 2016, NBK largely stayed out of the FX market consistent with inflation-targeting.
- ER flexibility has helped absorb external shocks.
- Challenges and observations:
- Excess liquidity: increased tenge liquidity associated with deposit dedollarization and public spending; likely structural as bank lending has stalled.
- Yield curve: NBK notes have built the short end of the tenge yield curve; need cooperation with the Ministry of Finance to develop longer maturities, deepen the market, enhance market liquidity, and encourage institutional investor participation.
- Long-term FX swaps: most remaining NBK long-term FX swaps expire in 2017 and should not be renewed as banks now have ample tenge liquidity.
- Exchange rate policy: authorities should refrain from FX market intervention except to dampen excess volatility; NBK should communicate that the tenge will be flexible.
- Analytical capacity and communication: NBK has made substantial progress; this should continue.
- Monetary policy guidance:
- Focus should remain on inflation as primary objective.
- NBK reduced its base rate by 500 basis points since February 2016.
- Lower expected inflation in the 12-to-18-month horizon would allow NBK to continue easing to support activity.
- A change in the NBK mandate to explicitly include growth is not advisable; monetary policy is not well-suited to address structural issues such as lack of “bankable” projects.
Financial sector — vulnerabilities and recommended actions
- Current situation:
- Financial sector weaknesses persist; bank lending is depressed.
- NBK intervened at two small banks; other banks may need additional capital to address high non-performing loans (NPLs).
- Banking sector historically characterized by complex and opaque finances and operations.
- Key recommended actions:
- Reporting and diagnostics:
- Re-establish consolidated reporting to present a clear picture on NPLs and capital adequacy.
- NBK should proceed with diagnostics (stress testing, asset quality review).
- Develop internal risk-based supervisory methodology and assess bank reporting practices and audit quality in final supervisory evaluation.
- Additional capital and mergers:
- Recognize loan losses and obtain capital injections by shareholders.
- Further forbearance on capital requirements should be strictly limited.
- Banks should raise required capital or exit; mergers should be voluntary and backed by robust due diligence.
- Credible capital and business plans essential, especially for large mergers with competition/concentration implications.
- Liquidity provision:
- Accelerate work on NBK’s Lender of Last Resort (LoLR) provisions.
- NBK should not provide unsecured funds to banks.
- Government and SOEs should review placement of bank deposits.
- Pension fund (UAPF) should not place deposits in weak banks and should focus on strong investment returns.
- Emergency liquidity support should be available only to viable banks, be fully collateralized, include MOF guarantee where needed, be provided at penalty rates, and include time-bound repayment plans.
- Intervention and resolution:
- Timely intervention at weak banks necessary to avoid larger losses.
- NBK should have strong support from the presidential administration and government and necessary resolution tools, including adequate legal basis for powers and actions.
- NBK may need authority to replace bank management and require pre-approval of transactions.
- Fast-track legislation may be necessary to ensure NBK can act quickly and decisively, including bail-in of shareholders, assumption of management authority, and resolution of assets.
- Capital support:
- Public financial support for bank resolution should be provided only under strict conditions, with robust due diligence.
- Public funds should be used only for viable, systemic institutions and when financial stability is at risk.
- Shareholders should be fully diluted on a consolidated basis before public funds are used; shareholders should not retain claims on assets.
- Capital support should come from the state budget—from the NFRK or from domestic or international debt issuance—and not from the NBK (or the UAPF).
- MOF should consider providing capital support in the form of regular marketable, liquid government securities.
- Liquidation of bad assets:
- Bad assets obtained from banks, including land and real estate, should be liquidated quickly by the Problem Loan Fund (PLF) via a transparent, auction-type approach.
- Legal and regulatory changes and external advisors may be needed to support stepped-up PLF operations.
- IMF staff position: supports strong and timely actions to deal with weak institutions.
Fiscal policy
- Recent stance:
- Fiscal policy has been supportive of growth; Nurly Zhol bolstered activity in SMEs, housing, construction, and transportation.
- Spending under Nurly Zhol will be reduced as it is phasing out; some spending categories, notably social expenditures, are expected to rise.
- Tenge depreciation supported non-oil revenues in 2016, especially VAT receipts.
- Pickup of oil prices expected to boost revenues in 2017.
- Financing and buffers:
- Deficit financing will continue to rely primarily on transfers from the NFRK.
- Fiscal buffers remain large; public debt remains relatively low.
- New NFRK rules aim to reduce dependency on oil and maintain strong buffers.
- Medium-term consolidation and targets:
- New NFRK concept envisages decline of the non-oil deficit to 7 percent of GDP by 2020 and 6 percent by 2025.
- IMF staff view: this path aligns with long-term estimates of a sustainable non-oil deficit but will require adjustment of around 4-5 percent of GDP.
- Adjustment should come through cuts in low-priority spending and especially increases of non-oil revenues.
- New tax code should rationalize tax exemptions and preferential treatments; higher and more progressive tax rates are likely to be needed.
- A comprehensive review of non-oil and oil tax regimes by the IMF Fiscal Affairs Department would be important to identify revenue-raising options.
- Staff calls for full adoption of IMF Government Financial Statistics reporting standards and more comprehensive coverage of fiscal accounts; IMF stands ready to provide technical assistance.
- Contingent liabilities:
- Close monitoring of SOE debt (30 percent of GDP) and other contingent liability risks is warranted.
Structural reforms
- Reform agenda:
- Ambitious reform program underway to support diversification, broad-based growth, and improved public administration efficiency.
- Flagship 100 Concrete Steps initiative aims to adopt legal and regulatory changes and spell out implementation actions.
- Key assets have been identified for privatization.
- Implementation challenges and priorities:
- Success hinges on coordinated, decisive implementation as reforms reinforce each other.
- Not all items have detailed legislation or action plans; in some cases follow-up implementation plans are not yet clear.
- Authorities should develop and communicate strategy and step up implementation to ensure positive effects materialize.
- Key milestone: successful conclusion of the first wave of IPOs (Air Astana, KazakhTelekom, KazAtomProm).
- Other IPOs and asset sales should follow (e.g., KazMunaiGas, Samruk Energy and electricity distributors).
- Special attention needed for reforms and productivity in agriculture and transportation sectors.
Closing and IMF role
- The IMF mission team thanked the Kazakh authorities for hospitality and constructive discussions.
- IMF staff stands ready to provide additional policy advice and technical assistance to Kazakhstan.
IMF Communications Department. Kazakhstan: Staff Concluding Statement of the 2017 Article IV Mission. February 8, 2017.