KazTransOil pipeline in Kazakhstan: the country was spared the worst of the crisis impact owing to prudent management of its oil revenues (photo: Newscom)
ECONOMIC HEALTH CHECK
In its annual health check of the oil-rich Central Asian economy, 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. But Kazakhstan must resolve bank weaknesses exposed by the crisis, the IMF stressed.
“A comprehensive strategy to reduce nonperforming loans is urgent and should be accompanied by a full assessment of recapitalization needs for systemically important banks,” the IMF assessment said, noting that the country would also need to upgrade the banking system’s regulatory and supervisory frameworks.
Rapid growth, then sudden stop
Kazakhstan, the largest landlocked country in the world, is the site of the most significant new oil discovery in recent years. The oil sector dominates the economy, accounting for one-fourth of GDP, 60 percent of total exports, and 40 percent of total budget revenues. Major foreign investment in this sector helped fuel strong GDP growth between 2000 and 2007, averaging about 10 percent a year.
At the same time the economy was experiencing rapid growth, Kazakhstani banks borrowed heavily from abroad, amassing external debt amounting to roughly 44 percent of GDP to fund a rapid expansion of credit, largely concentrated in construction and real estate. When the global financial crisis hit and capital stopped flowing into the country, credit growth ground to a halt, and property prices slumped. With oil prices plummeting, Kazakhstan faced a drop in the value of its exports from $76.4 billion in 2008 to $48.2 billion in 2009.
The combination of weak economic growth, currency-induced credit exposure, and increased uncertainty led to significant difficulties in the banking system. Four Kazakhstani banks were forced to restructure their external obligations, and nonperforming loans—that is, loans that are either in default or close to it—began to rise sharply.
Swift crisis response
Owing to the government’s ample resources and low public debt, the authorities were able to respond swiftly to the crisis. Drawing upon savings in the National Oil Fund—a nest egg established by the government in 2001 to save oil income for future generations and to reduce dependency on the budget when shocks arise—the authorities helped stabilize banks with a large-scale policy package. The government took equity stakes in four large distressed banks; public entities transferred deposits from elsewhere into the troubled banks; and sectors where nonperforming loans were concentrated (mainly real estate and construction) received funding on preferential terms.
Because public debt is less than 20 percent of GDP, the government was able to use fiscal measures to counter the crisis impact, increasing budgetary outlays for pensions, public sector wages, and social benefits. Monetary policy was likewise supportive in 2009, with low interest rates and easy access to liquidity contributing to an improvement in bank liquidity. And the tenge, Kazakhstan’s currency, was devalued by 20 percent in early 2009, easing pressures on reserves and restoring competitiveness with Russia, its large neighbor and key trading partner.
Next steps for promoting growth
Kazakhstan’s 2010 economic assessment discussions focused on the need to take action in three main areas in order to sustain the country’s recovery:
• Comprehensive and transparent resolution of nonperforming loans in the country’s banks. Nonperforming loans on a 90-day overdue basis have risen to 26 percent of total loans—up from 3½ percent in mid-2008—demonstrating Kazakhstan’s urgent need for a strategy to resolve bank weaknesses. In parallel, the macroprudential framework should continue to be strengthened to address the key vulnerabilities that led to the deterioration of bank credit portfolios, including excessive reliance on foreign funding and risky lending practices. On the difficult trade-off between imposing enhanced regulations to strengthen banks’ balance sheets and promoting credit growth through directed lending policies, the restoration of banking system health should take precedence.
• Fiscal consolidation based on increased savings of oil revenue. Withdrawal of government support for Kazakhstan’s troubled banks—removal of the public entity deposits and the divestment of government equity stakes in banks—and the winding down of stimulus spending should be gradual. Official support is still critical in the near term, but such support should be couched in a medium-term plan for fiscal consolidation, centered on maintaining the quality of public spending and increasing savings of oil revenues for future generations and in case of future shocks.
• Domestic financial market development to discourage dollarization (that is, the widespread use of a foreign currency instead of the domestic currency). With lower external funding and increased savings of oil resources, Kazakhstan needs to strengthen domestic deposits over the medium term to finance productive activities. This should be supported by efforts to deepen domestic money markets, promote long-term liquidity in the domestic currency, and foster good risk management practices.
Over the longer term, the Kazakhstani authorities plan to reduce their dependency on oil and advance diversification of their economy by improving the business environment, modernizing enterprises, creating new high value-added export-oriented sectors, and providing support to industries such as telecommunications and transport. The government’s development strategy for the next decade, announced earlier this year, provides a strong basis for the economy’s gradual diversification—but its success hinges on the support of a well-capitalized and well-regulated financial system, IMF economists say.
