STIRRED, NOT SHAKEN: KAZAKHSTAN MANAGES THE LIQUIDITY

UNCLAS SECTION 01 OF 03 ASTANA 000016

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR SCA/CEN (O'MARA)

E.O. 12958: N/A
TAGS: ECON PGOV EFIN EINV KTDB KZ

SUBJECT: STIRRED, NOT SHAKEN: KAZAKHSTAN MANAGES THE LIQUIDITY
CRUNCH

Ref: (A) 07 Astana 3025 (B) 07 Astana 3185 (C) 06 Astana 1512

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1. (SBU) Summary. Top officials at the National Bank of Kazakhstan
and the Financial Supervision Agency, as well as Kazakhstan's
leading bankers see a very low risk of a default by a major
Kazakhstani bank. The difficulties for the banking sector and the
economy at large resulting from the global financial crisis are
being alleviated by the government's $4 billion assistance package,
which may eventually be increased further. Policymakers and
observers foresee only a moderate slowdown for the economy in 2008.
On the other hand, policymakers appear somewhat frustrated in the
face of the recent inflation surge. Still, they remain optimistic
about the long-term prospects for the Kazakhstani economy, as long
as there is no collapse of commodity prices. End summary.

Too Big to Fail: Major Banks Remain Confident
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2. (SBU) Kazakhstan's banking sector continues to grapple with the
sudden dry-up of global credit on which it had been heavily relying
prior to July-August 2007 (ref A, B). The well has not run entirely
dry: Jurgen Rigterink, Chairman of the Board of ABN Amro, told
visiting Treasury Advisor Thomas Lanier on November 28 that lines of
credit are still available to "some" Kazakhstani banks, albeit at
higher interest rates. However, Rigterink noted, western industry
analysts tend to lump Kazakhstani banks together, and the recent
decision of the Development Bank of Kazakhstan (DBK) to pull its
debt offering sent a bad signal to the market. (Note: A DBK
official confirmed to Econoff that the Bank decided to cancel its
Eurobond offering due to unfavorable market conditions. End note.)
Still, Rigterink considers it "unlikely" that the Kazakhstani
Government (GOK) would allow a top-five bank to fail. "There may be
a forced sale, a takeover," Rigterink mused, "I wouldn't want to be
an equity holder, but I would have no problem having a deposit [in
one of these banks]." Similarly, Dauren Karabayev, Deputy CEO of
Halyk Bank, told Advisor Lanier on November 30 that the chances of a
failure by a top-six bank are "very small."


3. (SBU) The operational assumption of the Kazakhstani banking
sector is that the country's big banks are "too big to fail," and
the other banks do not matter. Yelena Bakhmutova, Deputy Chairman
of the Financial Supervision Agency (FSA) told Advisor Lanier on
November 29 that in some circumstances - such as when a bank is
struggling and does not present "systemic risks" - it should be
permitted to go bankrupt. Bank deposits, she noted, are guaranteed
up to KZT 700,000 (approx. $5,800),and "the system has already
worked twice in the past. (Note: Baimukhanova was apparently
referring to the failures of two regional banks, including that of
Valut Tranzit in 2006, ref C. End note.) If a top-three bank
failed, she continued, "that would be a problem." However, she
stated, "these banks do present systemic risks," making it clear
that the government is committed to ensuring that no top Kazakhstani
bank fails.


4. (SBU) There appears to be a consensus among Kazakhstani bankers
that the biggest risk to the country's banking sector is the quality
of the credit portfolio. Several bankers who met with Advisor
Lanier in late November and visiting Federal Reserve Bank of New
York (FRBNY) officials Hunter Clark and David Wright on December
10-11 singled out Alliance Bank as probably the most vulnerable of
large Kazakhstani banks. Dauren Kereibayev, Alliance CEO, described
his bank to Advisor Lanier as the leader in consumer finance,
specializing in "very liquid" loans with an average size of $2,000
and average term of two years. Kereibayev stated that these loans
pose much lower risk than mortgages, to which Alliance has "the
lowest proportionate exposure" of all its competitors. However,
Asylbek Aydarkulov, Director of ATF Bank's International Department,
told visiting FRBNY officials that there is "lots of fraud" with
Alliance's "express-loan" program. The consumer credit rating
system, he explained, is still woefully underdeveloped.
Furthermore, he added, consumer lending is a difficult business in a
culture where it is common to borrow several hundred dollars from
family or friends.


5. (SBU) While several bankers said that the first seven to nine
months of 2008 may be challenging, they remain generally upbeat
about prospects for growth. Bank Turan Alem's (BTA's) CEO Dauren
Kereibayev told Advisor Lanier that "the most pessimistic scenario"
for 2008 is 10 percent asset growth. Magzhan Auezov, Managing
Director of KazKommertsBank, predicted 5-10 percent, at least during
the first half of 2008. BTA's Managing Director Georgiy Iosifyan
told the visiting FRBNY officials that there is still $7 billion
circulating in the Kazakhstani economy outside the banking sector
("under the mattresses"). There is thus potential, Iosifyan
concluded, to attract more deposits as confidence in the banking
sector grows.

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6. (SBU) Several bankers noted that there is growing interest,
particularly from the Middle East, in Kazakhstan's banks. FSA's
Bakhmutova noted to Advisor Lanier that the GOK has abolished a 50
percent limit on foreign ownership of Kazakhstani banks. She also
remarked that there are currently 35 banks in Kazakhstan, "too many
in my opinion." She elaborated that the optimal number would be 20,
and that the FSA is considering measures to encourage consolidation.
However, due to the credit crunch, the bankers see as unlikely a
near-term foreign acquisition of a major Kazakhstani bank akin to
the June 2007 (pre-credit crunch) purchase of Kazakhstan's ATF Bank
by Austria's Unicredit. On the other hand, BTA's Iosifyan stated
that BTA is currently trying to sell to a foreign investor its
subsidiary Temir Bank, a large retail bank, the value of which
Iosifyan estimates at $1.5-2.0 billion. A lower-ranking BTA
executive recently told Econoff that BTA's efforts to sell Temir are
driven by necessity. BTA, he said, has been laying off staff and
needs an influx of funds to service its debts.

The $4 Billion Package -- Government Proactive
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7. (SBU) The bankers, in general, appear to be quite supportive of
the proactive role taken by the government in helping Kazakhstan
navigate through the current financial turmoil. The sudden global
liquidity dry-up has presented a shock not only to the Kazakhstani
banking system but to the country's economy as a whole (ref A, B).
The GOK's widely announced $4 billion assistance package is meant to
address both. The money, $1 billion in 2007 and $3 billion in 2008,
is to be disbursed via Kazyna's Development Bank of Kazakhstan (DBK)
and injected into the banking system as deposits in the accounts of
participating commercial banks. The banks can use the funds for
issuing credit but only in accordance with specific directives. Of
the $1 billion disbursed in 2007, $400 million is earmarked for
residential housing (for completion of ongoing construction projects
in Astana by financing either construction companies or mortgage
holders),$400 million for SMEs, and $200 million for innovative
industrial projects. The breakdown for the 2008 package does not
appear to have yet been decided.


8. (SBU) BTA's Iosifyan told the FRBNY officials that the government
has hinted of its willingness to increase the 2008 assistance
package by another $3 billion, bringing its total value to $7
billion. National Bank of Kazakhstan (NBK) Chairman Anvar Saidenov
explicitly stated to the FRBNY officials that the government would
not tap into the National Oil Fund for the money, but rather that
the funds will come from the national budget, through shifting
resources from "other budgetary activities."


9. (SBU) The package is an outcome of close collaboration between
the government and the leading banks. As one of the bankers mused,
"a key difference between Kazakhstan and Russia is that here the
government can get together with the top banks." The government's
assistance to the banks comes with strings. According to Alliance's
Kereibayev, the participating bankers promised not to finance new
construction but to complete ongoing projects, and to borrow abroad
only to refinance existing debt. Participating banks are also
limited in their ability to engage in lending activities abroad.

Economic Outlook Still Robust
--------------


10. (SBU) Some economic worries clearly remain. While FSA's
Baimukhanova emphasized to Advisor Lanier that Kazakhstani banks are
fully capable of paying out $12 billion next year to service their
external debts, she noted that this obligation "can affect the
economy." Still, most bankers, as well as FSA's Baimukhanova and
NBK's Sartbayev, foresee only a moderate economic slowdown,
expecting the 2008 growth rate to be in the range of 5-8 percent.
Baimukhanova, however, stated that the economic risks may increase
in 3-5 years, because the banks' borrowings - which started only in
2002 - will then result in a high redemption burden. Baimukhanova
opined that if that period coincides with a fall in commodity
prices, the Kazakhstani economy will face problems.


11. (SBU) Short-term challenges also remain. In November,
year-on-year inflation hit 17.5 percent, propelled by soaring food
prices (up nearly 25 percent year-on-year). This remains a
politically sensitive issue. According to one private sector
analyst, on average nearly 40 percent of household expenditures are
spent on food. Speaking to Advisor Lanier, NBK's Deputy Chairman
Sartbayev implied that the NBK faces limited options in controlling
inflation. In Kazakhstan, Sartbayev explained, lack of liquidity
actually contributes to inflation via higher costs for importers
financing their goods purchases. Thus, raising rates may actually
fuel inflationary pressures. What does help against inflation, he

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continued, is a steady exchange rate. On this score, NBK Chairman
Saidenov told the FRBNY officials that the NBK has no particular
target for the exchange rate. (Comment: This remark is somewhat
contradicted by the tenge's remarkable failure to venture outside
the 120-121 per dollar range over several months. End comment.)
Saidenov stated that the central bank's policy is "to allow
fluctuations both ways but to moderate them." Due to balance of
payment pressures (ref B),Saidenov expects some pressure on the
tenge in 2008. On this, he stated, "We are willing to strike a
balance between spending a couple of billion dollars from reserves
to support the tenge on one hand, and allowing moderate depreciation
on the other."

Comment
--------------


12. (SBU) Nearing the six-month mark following the advent of the
liquidity crunch, the Kazakhstani economy and the banking sector
appear to be taking the challenges in stride. Most of the impact,
so far, has been on the office and residential construction sectors
in Almaty. Economic growth forecasts have been cut to some extent,
but the government's commitment to supporting the financial sector
is clearly providing important reassurance. At the same time, the
comments by National Bank Deputy Chairman Sartbayev on inflation
demonstrate policymakers' frustration with the inflation surge,
which cannot be controlled with monetary contraction and is largely
fueled by rising global commodity prices, especially on grain. The
remarks by the Financial Supervision Agency Deputy Chairman
Baimukhanova on possible economic risks in 3-5 years' time echo
another aspect of Kazakhstan's economic reality: the country, with
its strong record of prudent fiscal and monetary policies, is
well-positioned to withstand substantial economic shocks-- as long
as commodity prices remain high. On this front, Kazakhstan appears,
for now, to have little reason to worry.

ORDWAY