KAZAKHSTAN: NATIONAL BANK CHAIRMAN FORESEES 2010

UNCLAS SECTION 01 OF 02 ASTANA 001744 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/ESC PLEASE PASS USTDA, OPIC, EXIM E.O. 12958: N/A TAGS: PGOV PREL ECON EFIN KZ SUBJECT: KAZAKHSTAN: NATIONAL BANK CHAIRMAN FORESEES 2010 TURNAROUND REF: A. ASTANA 1628 ¶B. ASTANA 1626 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: At a meeting with the Ambassador on September 28, Chairman of the National Bank Grigoriy Marchenko predicted economic recovery would begin early in 2010, following restructuring of BTA Bank. He foresees 2-3% growth and a return to a normal external debt ratio under 20% of GDP. As he considered the economy's next steps, Marchenko argued for foreign banks to remain a minority in Kazakhstan, because, in his view, they bring few benefits to an economy in good times and stop lending in bad times. END SUMMARY. POSITIVE ECONOMIC OUTLOOK ¶3. (SBU) On September 28, Governor of the National Bank Grigoriy Marchenko described to the Ambassador his cautiously positive outlook on Kazakhstan's economy. Inflation has decreased to 6.2% from its high of over 20% one year ago. He argued that, contrary to rumors, the exchange rate is stable and will be maintained at its current rate of about 150 tenge to the dollar. Given commodity prices, he said, this position "is a no-brainer, that is defendable." He termed bank liquidity increasingly healthy, having risen from $2 billion February to $8 billion now. ¶4. (SBU) On troubled banks, Marchenko expressed his optimism about a quick resolution at Alliance, because "it is smaller and restructuring negotiations are more advanced" (ref A). According to Marchenko, "the only black dot on the overall economic picture is BTA Bank." All parties must find a speedy resolution to BTA's restructuring (ref B),he argued, in order to return confidence to the market. He expressed his hope that BTA and its creditor steering committee will sign an overall agreement on December 7 in light of the September 18 MOU. Echoing a statement to ECA delegations, Marchenko argued the psychological importance of a conclusion to BTA restructuring. Currently, banks are scared to lend, he stated, but BTA restructuring would signal that the worst is over. Banks would more readily loan money, and individuals and companies would more willingly borrow it. Such a credit growth, accompanied by a recovery in the real-estate market that would increase the value of collateral, would lead to overall economic improvement. ¶5. (SBU) Adding to his positive forecast, Marchenko predicted 2-3% growth in the coming year, if Kazakhstan attracts foreign investment. Although he posited international capital markets might not lend until the fall of next year, Marchenko asked rhetorically, "Why borrow when we are overly liquid?" Looking to the remainder of 2009, Marchenko predicted, "KKB [Kazakhstan Kommerce Bank] will finish its repayment of $800 million before the end of the year, and then it will owe nothing. BTA will only need to service its debt. I hope Alliance will be done, and BTA close. Our $46 billion in [total external] debt [as of January 2008] is now $32 billion, not including BTA and Alliance restructuring. In January, it might fall to $20-22 billion, which would return the debt to less than 20% GDP -- more or less normal -- in two and a half years. Then, people will feel more confident. The economy will improve." FOREIGN BANKS ARE NOT OUR SAVIORS ¶6. (SBU) Marchenko argued that the Sovereign Wealth Fund Samruk-Kazyna will not want to remain a controlling shareholder of BTA and Alliance following their restructuring. Samruk-Kazyna must sell, he said, but "should they sell to foreigners?" According to Marchenko, Kazakhstan's overall banking environment would change if foreign banks take control of BTA and Alliance, tipping the balance of foreign ownership to four of Kazakhstan's six biggest banks. ASTANA 00001744 002 OF 002 ¶7. (SBU) When the Ambassador asked whether this would be a "positive or negative change," Marchenko pondered the question and concluded, "lateral." "Foreign banks are not our saviors. In their 18 years of operations in Kazakhstan, they have not done anything [for us]. They have not brought in new technology. They prefer to do what they know -- service large multi-national corporations," he lamented. According to Marchenko, their "only value-added" comes through training programs. "Increased competition, new technology -- these are just hype by Western media funded by Western banks themselves," Marchenko stated. He argued that the recent Central European and Baltic experience has shown that too much foreign involvement is bad in a time of crisis. Becoming obviously frustrated, he continued, "They stop lending. Boards make decisions far away that benefit the banks' bottom lines, not the countries where they are operating. They do not listen to local staff when they plead for a resumption of lending. They don't give a shit about the countries!" Finally, he concluded that foreign banks should not compose more than 40% of Kazakhstan's banking sector, and the government should re-impose a 50% maximum. ¶8. (SBU) COMMENT: Although Marchenko, a trusted advisor to both President Nazarbayev and Prime Minister Massimov, clearly believes in the psychological nature of the current crisis, his positive economic outlook is not simply an effort to "cheerlead" the country out of the downturn. Because he is widely known as hard-headed, pragmatic realist with a successful track record in both economic and political spheres, and is especially credited for his precise devaluation of the currency earlier this year, observers should consider his analysis seriously. That said, successful BTA and Alliance restructuring, upon which his optimistic outlook depends, remains largely outside his control. END COMMENT. HOAGLAND