Identifier
Created
Classification
Origin
09ASTANA68
2009-01-14 10:44:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

KAZAKHSTAN: GLOBAL FINANCIAL CRISIS HITS HARD, BUT

Tags:  PGOV ECON EFIN EINV KZ 
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UNCLAS SECTION 01 OF 04 ASTANA 000068 

SIPDIS
SENSITIVE

STATE FOR SCA/CEN, EEB
STATE PLEASE PASS USTDA FOR DAN STEIN

E.O. 12958: N/A
TAGS: PGOV ECON EFIN EINV KZ
SUBJECT: KAZAKHSTAN: GLOBAL FINANCIAL CRISIS HITS HARD, BUT
GOVERNMENT TAKES AGGRESSIVE MEASURES TO SUPPORT ECONOMY

REF: (A) 08 STATE 134459 (B) 08 ASTANA 2291 (C) 08 ASTANA 2320 (D)
08 ASTANA 2338 (E) 08 ASTANA 2351

ASTANA 00000068 001.2 OF 004


UNCLAS SECTION 01 OF 04 ASTANA 000068

SIPDIS
SENSITIVE

STATE FOR SCA/CEN, EEB
STATE PLEASE PASS USTDA FOR DAN STEIN

E.O. 12958: N/A
TAGS: PGOV ECON EFIN EINV KZ
SUBJECT: KAZAKHSTAN: GLOBAL FINANCIAL CRISIS HITS HARD, BUT
GOVERNMENT TAKES AGGRESSIVE MEASURES TO SUPPORT ECONOMY

REF: (A) 08 STATE 134459 (B) 08 ASTANA 2291 (C) 08 ASTANA 2320 (D)
08 ASTANA 2338 (E) 08 ASTANA 2351

ASTANA 00000068 001.2 OF 004



1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: The financial crisis continues to hit Kazakhstan
hard, but the government has responded in a vigorous, aggressive
manner that should maintain social stability and support modest
economic growth in 2009, particularly if oil production increases as
expected. That said, there are continuing concerns about the
transparency of the government's anti-crisis measures, the
vulnerability of Kazakhstan's banking sector, and the ability of the
National Bank to support the currency. END SUMMARY.

GROWTH RATE DOWN


3. (U) At a January 6 meeting in Almaty, the government and
National Bank delivered a joint report to President Nursultan
Nazarbayev on Kazakhstan's economic achievements in 2008 and
prospects for 2009. Prime Minister Karim Masimov informed
Nazarbayev that according to preliminary estimates, GDP growth for
2008 "topped 3%." This figure is below downward-revised earlier
estimates of 5% growth for the year and is a marked decline from the
average annual 9.6% growth achieved during 2005-07. Sergei
Shatalov, World Bank Country Manager for Kazakhstan, told us on
January 13 that the World Bank expects Kazakhstan's GDP to grow by
5% in 2009, provided the government's expectations of a 13-15%
increase in oil production are met. Shatalov noted, however, that
the IMF projects just 1% growth for Kazakhstan in 2009, primarily
due to stagnation in non-tradable commodities.


4. (SBU) The sluggish growth is largely attributable to the direct
and indirect effects of the global financial crisis. Bank lending
has been significantly constrained, with Kazakhstani banks unable to
replenish their external borrowing and holding portfolios in which,
according to government estimates, 6-7% of loans are non-performing,
and perhaps up to 20% are "under stress" (see reftel C). The global
economic slowdown caused by the financial crisis has significantly

reduced prices for key Kazakhstani commodity exports, including
crude oil and metals.

BLUE CHIPS TAKE A TUMBLE


5. (U) During a January 13 Cabinet meeting, Minister of Labor and
Social Protection Berdibek Saparbayev said that due to the global
economic crisis, 25 enterprises in Kazakhstan have gone out of
business, costing 7,000 employees their jobs, while 234 enterprises
were forced to reduce operations, resulting in an additional 28,000
layoffs. Even Kazakhstan's strongest, most well-established
enterprises have not been immune from the crisis. For example, from
June 2, 2008 to January 2, 2009, the value of shares in a number of
leading Kazakhstani companies dropped dramatically:

- Global Deposit Receipts (GDRs) for KazKommertsBank were down 55%,
from $16.30 to $7.45 per share;

- GDRs for KMG Exploration and Production, a subsidiary of national
oil and gas company KazMunaiGas, declined by 58%, from $31.40 to
$13.20 per share;

- GDRs in Alliance Bank dropped by 84%, from $5.55 to $0.89 per
share;

- shares in Eurasian Natural Resource Corporation were down 75% on
the London Stock Exchange, from 1,444.00 pounds to 362.50 pounds per
share; and

- shares in copper giant KazakhMys fell by 85% in London, from
1,686.71 pounds to 255.00 pounds per share.

CRISIS RESPONSE PLAN


ASTANA 00000068 002.2 OF 004



6. (U) At the January 13 cabinet meeting, Minister of Economy and
Budget Planning Bakhyt Sultanov presented a detailed action plan to
Prime Minister Masimov in response to the financial crisis. As
previously announced, approximately $10 billion for anti-crisis
measures will be allocated from the National (Oil) Fund, which
currently holds assets of $27.6 billion. In total, the government
has announced plans to inject up to $18 billion (approximately 20%
of GDP) into the economy. The government's crisis response plan
includes a $4 billion investment in the financial sector, including
the intended purchase of 25% equity stakes in Kazakhstan's four
largest banks; $3 billion to complete housing construction projects
and strengthen the mortgage lending system; $1 billion to bolster
small- and medium-sized businesses; $1 billion for the agricultural
sector; and $1 billion for infrastructure and industrial projects.


"BILLION-DOLLAR BLACK BOXES"


7. (SBU) Ulf Hindstrom, senior banker for the European Bank for
Reconstruction and Development (EBRD),told us on January 13 that
the government's anti-crisis plan contains "a lot of billion-dollar
black boxes," and lacks a compelling, overarching strategy to
stabilize the economy. Furthermore, he added, "the government
hasn't spent any of the money yet. They're only talking about
spending the money." World Bank Country Manager for Kazakhstan
Sergei Shatalov conceded this point, but added that the government's
repeated public pronouncements may have positive psychological
effects on the population, if they can be convinced that the
government is taking decisive action to address the crisis.

GOVERNMENT EXPECTED TO MAINTAIN SOCIAL STABILITY


8. (SBU) Both the EBRD's Hindstrom and the World Bank's Shatalov
believe that despite the crisis, the government will continue to
honor the social contract and deliver basic social services such as
education, health care, and housing.
Hindstrom is optimistic about the medium- to long-term outlook in
Kazakhstan and expects stable growth in the country's production of
oil, uranium, coal, and grain. In the short-term, however, he
worries that the government has succumbed to a "temptation to enact
populist measures" that may adversely affect economic growth. He
noted in particular the government's proposal to impose price
controls for electrical power that will likely deter private
investment in the modernization or expansion of infrastructure.

INVESTMENT IN INFRASTRUCTURE A WISE CHOICE


9. (SBU) Hindstrom defended investments in infrastructure as a
sound crisis response measure and noted that the government is
willing to undertake enormous infrastructure projects (e.g., roads,
railroads, etc.) in order to demonstrate visible results, make large
capital investments, and create jobs. (NOTE: Under the aegis of
the Central Asia Regional Economic Cooperation, the EBRD, Asian
Development Bank (ADB),and the World Bank are co-funding one of the
largest infrastructure investments in Kazakhstan, the multi-billion
dollar Transport Corridor to China project. END NOTE.) However,
"The problem with the government's infrastructure investments,"
according to Hindstrom, "is the penchant for funding white elephant
projects," such as the six-lane highway from Astana to the resort of
Borovoe, which, he argued, "has no legitimate economic
justification."

STRAIGHT A'S


10. (SBU) Almaty, Astana, Atryau, and Aktau will receive the
majority of money, support, attention, and protection during the
financial crisis, contended Shatalov, possibly at the expense of
other cities and regions. Prime Minister Masimov's actions seem to
be consistent with Shatalov's prediction. On January 13, Masimov
ordered Kairat Kelimbetov, chairman of the Samruk-Kazyna National
Welfare Fund, to prepare a special anti-crisis plan for Astana and
Almaty within the next two weeks because of the "special importance"

ASTANA 00000068 003.2 OF 004


of those two cities to the economy. Masimov noted that Astana and
Almaty are the real estate and financial centers of Kazakhstan and
said "the lion's share of the government's anti-crisis measures will
be taken in those two cities."

BANKING SECTOR "VULNERABLE"


11. (SBU) The banking sector is extremely vulnerable and heavily
leveraged, according to Shatalov and Hindstrom. Minister of Economy
Sultanov seemed to acknowledge this when he told the Cabinet on
January 13 that the government, "must urgently rehabilitate
second-tier banks by using the Distressed Assets Fund to purchase
problem assets as soon as possible." The problem, according to the
World Bank and EBRD, is that the Financial Supervision Agency (FSA)
does not know the true value of toxic assets and has no reliable way
to determine their value. Hindstrom said, "We simply don't know how
bad things really are," partly because a bank's loan portfolio is a
fast-moving target. A borrower's status and fiscal health can
change rapidly, he said, particularly if a company cannot secure the
capital needed to fund expansion or even payroll obligations.
Shatalov said the aggregate value of Kazakhstan's "doubtful debts"
is could be as high as $30 billion. Both Shatalov and Hindstrom
agreed that closer banking supervision and regulation are absolutely
essential and they said the government is taking steps in the right
direction, including its investment of $4 billion in the banking
sector.

RESTRUCTURING DEBT TO AVOID DEFAULT


12. (U) On December 9, Samruk-Kazyna Chairman Kelimbetov said
publicly that the state is "prepared to negotiate with foreign
investors on the restructuring of the debt of Kazakhstani commercial
banks." Although major banks politely declined the offer, the
threat of forced debt restructuring remains in play. Kazakhstani
banks owe more than $40 billion to foreign creditors, including
$10.6 billion due in 2009 and $7 billion due in 2010. In his
December 9 remarks, Kelimbetov said that the government would like
to discuss discount terms and repayment extensions with creditors.
Kelimbetov's comment quickly set off alarm bells in the financial
sector and was immediately "clarified" by National Bank Chairman
Anvar Saidenov. The National Bank and FSA continue to downplay
Kelimbetov's statements. On January 13, for example, FSA Chairwoman
Elena Bakhmutova categorically denied banks will default on their
payments. "We only raised the question of restructuring the banks'
external debts. Nobody is talking about default." She added that
the FSA has been talking "on a voluntary basis" with major
creditors, but the banks have not embraced the idea of debt
restructuring.

EXCHANGE RATE IS A CANARY IN A COAL MINE


13. (SBU) According to the World Bank's Shatalov, "there is massive
nervousness" about the exchange rate. Kazakhstan unofficially
pegged the tenge to the dollar in late 2007 and kept the exchange
rate between 120 and 121 tenge throughout 2008. On January 13, the
rate broke out of the corridor, with the tenge falling to 121.12.
Shatalov said the World Bank will monitor changes to the exchange
rate as an early warning indicator of structural stress in the
economy. National Bank Chairman Saidenov is well aware of the
importance of exchange rate stability and said on January 13 that
Kazakhstan will keep the exchange rate of the tenge under tight
control to protect Kazakhstan's heavily dollar-denominated economy.



14. (U) Imports have continued to increase even as overall economic
growth has stalled. In particular, Russian and Ukrainian imports
are driving Kazakhstani goods from local markets, which led Minister
of Industry and Trade Vladimir Shkolnik to call for higher duties on
imported food products. At the January 13 Cabinet meeting, Shkolnik
said, "The term for low tariffs on some of the most significant
foodstuffs imported into Kazakhstan expired on January 1, 2009.
Unless we raise the tariffs, cheap, imported products will flood our

ASTANA 00000068 004.2 OF 004


markets and drive out local manufacturers," he warned.

DOUBTS ABOUT SAMRUK-KAZYNA


15. (SBU) Analysts continue to debate the purpose of Samruk-Kazyna,
the behemoth, state-owned National Welfare Fund created by the
merger of mega-holding company Samruk and national development fund
Kazyna (see reftel D). The EBRD's Hindstrom said, "It is still not
clear what the intent was behind the creation of this organization,
or what its current strategy is." He also said the merger might
lead to a conflict of interest, if, for example, Kazyna was to
provide funding for projects in which Samruk's companies are
invested. Prior to the merger, Samruk alone owned more than 90% of
Kazakhstan's asset base, including 19 companies and more than 300
legal entities in the oil and gas, mining, telecommunications,
transportation, and training sectors. Samruk reported more than
$24.5 billion in revenue in 2007.


16. (SBU) COMMENT: The government has taken aggressive steps to
respond to the financial crisis and has done well to keep
unemployment, inflation, and currency volatility in check. One
immediate priority appears to be maintaining social stability, which
the government hopes to achieve by completing housing construction,
regulating electricity and food prices, and encouraging foreign
investors to maintain current levels of employment. In the medium
term, there is serious concern about the ability of banks to meet
their outstanding obligations, with debt restructuring and industry
consolidation both a distinct possibility. Over the long term,
there is a danger that the government's increased involvement in and
ownership of the economy, especially the banking sector, will
restrict competition and prevent the emergence of new private sector
players. It is not clear at this point whether the government has
any intention of selling or divesting the assets it is acquiring and
aggregating. END COMMENT.

HOAGLAND