Identifier
Created
Classification
Origin
07ASTANA372
2007-02-13 01:10:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

COOL ME DOWN: KAZAKHSTANI CENTRAL BANK'S DEPUTY CHAIRMAN

Tags:  EFIN ECON ETRD KZ 
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RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHTA #0372/01 0440110
ZNR UUUUU ZZH
R 130110Z FEB 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 8424
INFO RUCNCIS/CIS COLLECTIVE 0029
RUEHAST/USOFFICE ALMATY
UNCLAS SECTION 01 OF 03 ASTANA 000372 

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ETRD KZ

SUBJECT: COOL ME DOWN: KAZAKHSTANI CENTRAL BANK'S DEPUTY CHAIRMAN
DISCUSSES OVERHEATING

REF: 06 ASTANA 492

ASTANA 00000372 001.2 OF 003


UNCLAS SECTION 01 OF 03 ASTANA 000372

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON ETRD KZ

SUBJECT: COOL ME DOWN: KAZAKHSTANI CENTRAL BANK'S DEPUTY CHAIRMAN
DISCUSSES OVERHEATING

REF: 06 ASTANA 492

ASTANA 00000372 001.2 OF 003



1. (SBU) Summary: In a January 19 meeting, Medet Sartbayev, Deputy
Chairman of Kazakhstan's Central Bank, discussed with Charge
d'Affaires the current state, the risks, and the outlook of the
Kazakhstani economy. Sartbayev expressed his concern with
persistent inflationary pressures, the real estate bubble, the
strength of the tenge, and risks arising from the remaining
weaknesses in the country's financial institutions. He emphasized,
however, that the government is pursuing policies designed to
address these problems. End summary.

THE HEAT IS ON
--------------


2. (SBU) Sartbayev, one of four Deputy Chairmen of the National Bank
of Kazakhstan (NBK),supervises the management of the National (Oil)
Fund's assets and issues of international cooperation. Speaking to
the Charge, he readily acknowledged the inflationary pressures
present in the Kazakhstani economy. Inflation, he said, reached
8.5% in 2006, and the NBK clearly recognized the real estate bubble
as an issue. He cited a number of contributing factors, including
burgeoning oil revenues, rapidly expanding borrowing by the
commercial banking sector (which, he noted, stood at about $20
billion at the end of 2006),corporate borrowing (roughly $30
billion at the end of 2006),and an expansionary fiscal policy,
particularly a 30% increase in government salaries over the course
of 2006.


3. (SBU) Sartbayev concurred with the Charge's observation that wage
growth was outpacing growth in productivity. This, he suggested,
relates to a difficult structural problem, with the service sector
dominating growth and industrial production (outside extractive
industries) weakening. While industrial production rose 4.5% in
2005 and is expected to increase 6% in 2006, its rate of growth
remains well below that of wages.


4. (SBU) Sartbayev emphasized that, given these pressures, the NBK
will continue its policy of inflation targeting. He also expressed
the hope that the new government would be more proactive in managing
the budget's contribution to inflationary pressures. Sartbayev made
it clear, however, that serious challenges remain. A key risk

factor for 2007, he said, is the strong growth of unhedged
short-term tenge positions taken by a number of financial sector
actors (banks, hedge funds, etc.). He drew a parallel with the
combined role of property and currency bubbles in Southeast Asia's
financial meltdown of the late 1990's.

HOLD THAT TENGE
--------------


5. (SBU) Sartbayev turned to the NBK's role in the currency market.
(Note: the tenge's steady rise has posed a particular challenge to
the NBK. The domestic currency's strength presents a major obstacle
to the cornerstone of President Nazarbayev's stated economic policy:
diversification away from the extractive sector. End note.) He
described the August-October 2006 events (when the tenge sharply
reversed its steady climb and gave back some ground to the dollar,
falling from its peak of about 118 KZT / $1 to around 128 KZT / $1,
as a "learning curve." Both the market and the NBK, he said, gained
experience and understanding of the NBK role in managing the new
mechanism for the National Fund (NF) (see reftel).


6. (SBU) The new mechanism, Sartbayev explained, compels the NBK to
be quite active in the foreign exchange markets as it
re-intermediates tenge receipts back into dollars and other
currencies for investment in the NF. (Note: According to another
NBK official, all but three or four "oil majors" with special
agreements with the GOK are required to pay their taxes and fees to
the government in tenge. End note.) Sartbayev cited the current
softening of oil prices as a factor putting downward pressure on the
tenge in the coming months, although he foresaw no significant
depreciation in the first half of 2007.


7. (SBU) Note: The sudden tenge reversal of August-October 2006
attracted significant public attention in Kazakhstan. In December
2006, an NBK official cited to Econoff two causes behind the shift:
the July 1, 2006 advent of the new NF mechanism (which "captures"
and converts into foreign currency more of the GOK's oil revenues
than the more leaky old mechanism did),and the NBK's open-market
operations aimed at breaking the tenge's rise. The latter
explanation dovetails with another insider's assertion that the NBK
has been trying to "flush out offshore speculators" who are betting
on the tenge's appreciation. Yet another well-informed observer
told Econoff that the NBK was following the IMF's advice to "break
the predictability" of the tenge's strengthening. The observer saw
this policy as futile: as the NBK takes increasingly drastic
measures to counteract the growing oil revenues' upward pressure on
the tenge, the currency's future rise "is more predictable than

ASTANA 00000372 002.2 OF 003


ever." End note.

HOME IS WHERE YOUR MONEY IS
--------------


8. (SBU) Sartbayev was frank in addressing the issue of the housing
bubble and responding to the Charge's remark that spiraling costs
make housing unaffordable to many. (Note: Based on one estimate,
at the end of 2006, mortgages comprised one-third of Kazakhstani
banking system's credit portfolio. Prices for both residential and
commercial property in Astana and Almaty now rival those in many
Central European cities, in some cases approaching as much as $2,000
per square meter. End note.) He observed that in addition to the
need to restrain liquidity, the government should review its
subsidies and other policies stimulating the construction industry.
He also noted that the Anti-Monopoly Agency could act more
effectively against oligopolistic behavior in the construction
industry.


9. (SBU) Note: Sartbayev appeared to be implicitly underlining the
linkage between construction, corruption, and the grey economy. In
fact, Post has seen ample evidence, albeit mostly anecdotal, of the
role of real estate in the grey economy. Astana and Almaty real
estate is widely seen as a suitable safe haven for "parking" wealth
away from the eye of the tax authorities. The public - and the
press - have noticed that, despite rising rents, a striking number
of premium apartments in Astana stand unoccupied; apparently, some
owners simply do not bother renting their "investments" out.
According to a well-informed westerner, the highest-end apartments
are appreciating the fastest, another sign of housing being used as
a speculative investment vehicle. End note.

A CAPITAL FOR YOUR CAPITAL
--------------


10. (SBU) Sartbayev emphasized the lack of alternative financial
instruments as a key factor inflating the real estate market and
noted that there had been gaps and weaknesses in regulation. While
reiterating the current risks to the financial sector, Sartbayev
cited several factors that he expects will help mitigate these
risks, particularly the initial phase of the realization of the
"Almaty Financial Center," and the development of non-bank financial
intermediaries. The emergence of these institutions, he said, could
broaden and deepen the types and volumes of financial instruments
available for trading, helping to alleviate the real estate bubble.


11. (SBU) Sartbayev also noted that the NBK was in early discussions
to explore with the government - as well as key private sector
financial actors - the possibilities for increasing the volume and
lengthening the maturities of NBK and/or GOK paper in the market.
He noted that having a suitable volume of government debt would make
the exercise of monetary policy more efficient, but that in
principle the NBK can and does plan to increase its issue in 2007.


12. (SBU) Note: The "Agency for the Regulation of the Almaty
Financial Center" was established in 2006. While it has ambitious
goals to transform Almaty into a regional financial powerhouse, the
agency remains rather vague about its plans. In December 2006, it
announced plans to build a trading platform alternative to the
existing Kazakhstani Stock Exchange (KSE). The KSE, its volume
dominated by block trades and its liquidity painfully low (bid-ask
spreads, according to an insider, often amount to one-third of a
listed stock's price),is a stock exchange that never quite managed
to take off. By comparison, the Kazakhstani bond market, stimulated
by government debt (always in high demand and low supply) and
domestic companies' preference for issuing debt over equity, is
significantly more developed. End note.

COMMENT
--------------


13. (SBU) Periodic (and limited) lapses in fiscal discipline aside,
the GOK has traditionally pursued a very sound macroeconomic policy.
Still, political interference remains a persistent risk. Great
disparities in wealth distribution increasingly add to the pressure
to raise government wages and pensions. Furthermore, as the
National Oil Fund grows dramatically (from $ 8 billion to $14
billion in 2006),the idea of "investing" some of its assets within
Kazakhstan is gaining prominence in the political discourse. Such a
shift would unquestionably make the NBK's task of controlling
inflation and holding down the tenge more difficult.


14. (SBU) As the Charge's discussion with Sartbayev demonstrates,
GOK policymakers are highly cognizant of these risks as well as of
the Kazakhstani economy's overdependence on oil. Indeed, the
official policies (economic diversification, development of
financial institutions, relative fiscal discipline) directly address
these issues. The principal question lies in the implementation,
particularly the government's ability and resolve to safeguard its

ASTANA 00000372 003.2 OF 003


initiatives from the pressures of politics and patronage. End
comment.

ORDWAY