The main reason why the Kazakh authorities have kept the local banking sector “afloat” through investing the public funds or taking the excessive liquidity off the market is, in fact, as simple as can be.
The thing is that the banking sector is an integral part of the Kazakh non-resource sector of the economy and, therefore, cannot be more well-worked than the latter.
The consequences of such excessive interference (and not so much for the benefit of the state as the owners of the big financial institutions usually controlled by the President’s close relatives and allies) are registered in the S&P Global Ratings’ press-release of December 12, 2018, on the ratings of DAMU Entrepreneurship Development Fund (DAMU) and Development Bank of Kazakhstan (DBK).
Here are some quotes (text in bold hereinafter by kz.expert).
“We believe that industry risk in the Kazakh banking system has increased because of a harsher competitive landscape following various actions by the government, government related-entities (GREs), and well-connected bank owners.
The banking system has become more polarized, in our view, with smaller banks pushed out of the market, while larger players benefit from government support and ad hoc government decisions, as well as customers' flight to quality. Although the share of state ownership in the Kazakh banking sector is currently low (below 5%), banks are highly confidence sensitive, typically have franchises that depend in part on the perceived reputation of their owners, and some rely meaningfully on public sector financing in the form of GRE deposits.
As a result, we think that the stability of individual banks is highly dependent on decisions taken by the government, which could be unpredictable and lack consistency for external observers. We believe Kazakhstan's banking regulators are also prone to regulatory forbearance policies, for example with regard to provisioning adequacy and capitalization.
We think that allocation of GREs' deposits, which account for about a quarter of total deposits in the system, is confidence-sensitive, volatile, and highly dependent on one-off government decisions. We have observed that the distribution of GRE deposits across Kazakh banks has supported some relatively weak large banks, while withdrawing funds from weak small banks.
We think that the negative impact of the prolonged correction phase on the banking sector will ease over the next two years. We therefore expect credit losses in the banking system to stabilize at 1.5%-2.0% in 2018-2020, following a spike of 9% in 2017”.
What S&P Global Ratings describes in a PC way as “the prolonged correction phase on the banking sector” we believe to be the main element of the general economic crisis. It started in Kazakhstan back in 2008 and, by our estimates, will continue for at least a couple of decades. Until the non-resource sector of the economy is able to meet competition on at least the regional level and starts growing not just on paper.
This is one of the reasons why, in the nearest future, the National Bank of Kazakhstan will not be able to change things for the better. This is the fact that has been truthfully registered in the Bank’s “Monetary Policy Guidelines for the Republic of Kazakhstan for 2019”.
Let us quote Chairman Daniyar Akishev’s admission one more time.
“Long-term, economic growth depends on the fundamental structural parameters that a country’s central bank cannot influence. A monetary policy, essentially, is stabilizing in nature and aims to smooth out economic cycles”.
Let us try and assess the situation in the Kazakh banking system based on the summary statistics of the sector. Below, you will find the table used in Article II of the series.
The first thing that we need to comment on is the significant increase of the banks’ liabilities to the clients from 1618 bln tenge as of January 1, 2005, to 17071 bln tenge as of December 1, 2018, in other words, by 10.6 times.
In terms of the US dollars, the growth does not look as significant – from about $12.4 to $45.9 bln, in other words, by 3.7 times only.
Thus, in the Kazakh banks, the volume of the temporary available cash assets owned by physical and legal bodies has dramatically grown for the past 14 years.
This means that, first, they have become significantly richer.
Second, that the following has played its positive (no pun intended) part:
- the authorities’ fight against the offshores and the improvement of the tax agencies’ operations – for legal bodies;
- several instances of property legalization, the high yield of tenge deposits and the problems with moving the money to the offshores and keeping it there – for physical bodies.
However, a lower yield and, most importantly, a higher riskiness of the other lines of investing the temporary available cash assets in the country (in comparison to bank deposits) or lack thereof resulted in the situation when everyone had rushed to the banks.
In their turn, the Kazakh banks with their excessive liquidity have encountered the deficit of high-quality borrowers which has existed in the country since the beginning of the independence. However, prior to the 2008 economic crisis, it was barely noticeable against the backdrop of the global economic boom. But later, especially during the periods of the crisis aggravation, it has turned into the problem of the doubtful, non-performing, unrecoverable loans growth.
Thanks to the 2009 – 2011 and the 2016 – 2018 large-scale “rescue” and “support” programs, the banking sector had continued to stay afloat. With that, a “bubble” was blowing up inside it.
As we can see, for the past 14 years, the volume of the receivables from the clients (in other words, loans) has grown by 7 times only: from 1629 bln tenge as of January 1, 2005 to 11363 bln tenge as of December 1, 2018.
In terms of the US dollars, the volume of the receivables from the clients has grown by 2.4 times only: from about $12.5 bln as of January 1, 2005, to $30.6 bln as of December 1, 2018.
As a result, the Kazakh banking sector has worsened its performance in terms of carrying out its main task – to redistribute the temporary available cash assets inside the national economy. If we are to calculate the volume of the loans provided by the Kazakh banks against every thousand tenge of their client liabilities, the dynamics will be as follows.
- as of January 1, 2005 - 1007 tenge;
- as of January 1, 2010 - 749 tenge;
- as of January 1, 2015 - 906 tenge;
- as of January 1, 2016 - 870 tenge;
- as of January 1, 2017 - 782 tenge;
- as of January 1, 2018 – 658 tenge;
- as of December 1, 2018 – 666 tenge.
Note that the last devaluations of the Kazakh national currency happened on February 11, 2014 and August 20, 2015 when the National Bank was chaired by Kayrat Kelimbetov.
Below are photos from the anti-devaluation meeting held in Almaty on February 12, 2014 – the day after the National Bank’s announcement:
Daniyar Akishev became the Chairman of the National Bank on November 2, 2015, and, already at his first press-conference, announced that “the regulator will minimize and then abandon the foreign exchange market interventions, the inflation rate will gradually decrease, the financial regulation will change. The National Bank will start pursuing the dedollarization policy”. (More on the subject here).
The blowing up of the money bubble is one of the consequences of the National Bank’s switch to the inflation targeting policy. Note that, unlike the way it happens in the more developed economies including Russia, the Kazakh bubble has concentrated primarily in the banking sector.
In this context, Akorda’s legalizations of the monetary funds and assets seem a mistake since they have contributed to the bank deposits growth and, therefore, aided the forming of the money bubble.
Whatever the case, the problem that the Kazakh monetary authorities are trying to solve lies beyond the area of their responsibilities. For some reason however, in regard to the currency market situation, the eyes of the experts and the public are fixed on the National Bank and its monetary policy even though the latter is but an agent and a tool in the hands of Akorda.
The topic continues in the forthcoming articles of the series