VZCZCXRO4902
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHTA #3185/01 3300514
ZNR UUUUU ZZH
R 260514Z NOV 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1249
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE 0317
RUEHAST/USOFFICE ALMATY 0017

UNCLAS SECTION 01 OF 02 ASTANA 003185 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN (O'MARA) 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EFIN EINV KTDB KZ
 
SUBJECT:  KAZAKHSTAN: GOVERNMENT ADDRESSING CHALLENGES IN BANKING, 
CONSTRUCTION; SEES MODERATED GROWTH IN 2008 
 
Ref: Astana 3025 
 
ASTANA 00003185  001.2 OF 002 
 
 
¶1.  (SBU) Summary.  Kazakhstan's central bank foresees 7 percent 
economic growth in 2008.  Even so, the bank's chairman acknowledged 
to the Ambassador that challenges remain, particularly for the 
banking and construction sectors.  The government appears firm in 
its commitment to support Kazakhstani banks, as necessary, and is 
already propping up the construction sector with budgetary funds. 
Still, the construction sector appears to be heading for difficult 
times.  Nevertheless, the tenge remains stable, the outflow of 
foreign reserves has ebbed, and the National Oil Fund is growing 
briskly.  End summary. 
 
A Soft Landing? 
--------------- 
 
¶2. (SBU) Anvar Saidenov, Chairman of the National Bank of Kazakhstan 
(NBK, the country's central bank), told the Ambassador on November 9 
that the aftereffects of the current global financial turbulence on 
the Kazakhstani economy (reftel) are well under control.  According 
to Saidenov, Kazakhstani commercial banks are servicing their debts 
on schedule.  As the banks are slowly unwinding their large external 
debts,`Qc4Qs 10.7 percent in 2006 and 9.7 
percent in the first nine months of 2007.  End note.)  Saidenov 
added that the current inflationary pressures are mostly due not to 
domestic liquidity ("which is high but not growing"), but to global 
trends, such as rising food and commodity prices.  Still, he stated 
that with December-to-December inflation expected to reach 15 
percent, the NBK will probably have to raise interest rates. 
 
¶3. (SBU) After a prolonged period of building up foreign reserves in 
an effort to slow down the tenge's appreciation, the NBK had to 
sharply reverse course in August in order to keep the domestic 
currency from falling (reftel).  With Kazakhstani banks no longer 
able to borrow abroad and instead servicing their accumulated 
external debts, their growing demand for foreign currency is 
pressuring the tenge.  By intervening via open market operations to 
keep the tenge at or around 121 to the dollar, the NBK has been 
providing implicit support of sorts to Kazakhstani banks (which have 
deposits in tenge but debts in foreign currency).  As a result, the 
NBK's foreign reserves fell from $22.0 billion in August to $17.4 
billion at the end of October.  In a possible sign that market 
pressures on the tenge are receding somewhat, the NBK's reserves 
recovered by November 15 to $18.2 billion.  Saidenov told the 
Ambassador that the NBK does not want to lose "too much in reserves" 
in defending the tenge and, therefore, expects it to depreciate 
somewhat. 
 
¶4. (SBU) Saidenov noted that the National (Oil) Fund (NF) continues 
to grow "very fast," already exceeding $20 billion in assets, and 
"is not being touched for now."  He elaborated that only a KZT 340 
billion ($2.8 billion) "guaranteed transfer" from the NF to the 
budget is currently planned for 2008.  Increasing the guaranteed 
transfer or sending more petrodollars into the budget (instead of 
the NF) would, Saidenov noted, require an act of Parliament. 
 
But Real Estate and Construction Catch a Cold 
--------------------------------------------- 
 
¶5. (SBU) Kazakhstani banks, Saidenov continued, remain vulnerable to 
a collapse in the domestic real estate sector.  However, he expects 
a cooling, not a collapse.  He stressed that the government will 
support the real estate sector due to "social factors," referring to 
the government's recently announced $4 billion support package.  The 
sum is to be disbursed over several years, and is earmarked 
specifically for the banking and construction sectors, which are 
seen as most affected by the current turbulence.  Approximately $1 
billion has already been disbursed under the plan.  The money, 
explained Saidenov, has been given to the Kazyna Sustainable 
Development Fund, which will lend it, at reduced interest rates, to 
commercial banks.  Under the terms of the program, the banks will be 
obligated to loan the funds to the construction sector at favorable 
interest rates.  Still, Saidenov acknowledged the challenges facing 
the banking sector ("next year will be tough for banks") and the 
construction sector ("some cleansing and consolidation will have to 
happen"). 
 
¶6. (SBU) Very difficult times on the construction sector's horizon 
was the picture painted on November 9 for the Ambassador by Dennis 
Price, an Almaty-based American executive with Kuat, a leading 
Kazakhstani residential construction firm.  According to Price, the 
Kazakhstani construction industry's two leaders, Kuat and Basis A, 
are both in dire straits.  According to Price, the two will not 
 
ASTANA 00003185  002.2 OF 002 
 
 
merge, but only one will survive.  He said that Kuat's sales have 
virtually come to a standstill over the past six months, and the 
company has not been paying wages since mid-August.  (Note: On 
November 1, about 100 Kuat construction workers held a largely 
unprecedented rally in Astana in front of President Nazarbayev's 
palace, protesting unpaid wages.  End note.)  Price described Kuat 
as a company plagued by a lack of transparency and bad management. 
While Kuat's cost structure is very vague, Price estimated the 
company's construction cost at $2,000 per square meter, a figure he 
described as excessively high, partly due to managerial "skimming." 
By contrast, Price said, the government is only willing to bail out 
banks and construction companies at $1,000 per square meter.  He 
added that he expects the Almaty real estate prices to settle down 
in the $1,500-1,800 per square meter range in the next four years. 
 
¶7. (SBU) While government support may be key to helping the real 
estate and construction sectors weather the current storm, its 
actual effects may, at least in the short term, be more complex. 
Galym Orazbakov was quoted by the media in October, stating that the 
government would buy housing from "weak" builders and sell it to the 
public at just $800 per square meter.  According to one informed 
observer, the well-intentioned announcement had a chilling effect on 
the real estate market, as the already nervous public settled in to 
wait for prices to fall to $800. 
 
Comment 
------- 
 
¶8. (SBU) The latest projection of 7 percent economic growth in 2008 
provides a telling indicator of the Kazakhstani economy's oil-fueled 
resilience.  While the unwinding of Kazakhstani banks' commercial 
debt may lead to medium-term tenge depreciation and some depletion 
of foreign reserves in support of the currency, the long-term trend 
for the tenge will be dictated by the country's growing oil exports 
and thus remains toward appreciation.  The government stands ready 
to support the banks and, to some extent, the construction sector. 
In the case of the banks, this is designed to provide liquidity and 
credit to the non-extractive sectors that might otherwise be in 
serious trouble if credit lines dried up.  In the case of housing, 
the government is motivated in part to "rescue" individual 
purchasers who have made very substantial pre-payments when or 
before construction started.  It is unclear, however, how effective 
government action will be in supporting the unraveling real estate 
bubbles in Almaty and Astana.  There is also some risk that 
government action will go too far, rewarding reckless lending with a 
bailout and creating a moral hazard.  Prime Minister Masimov told 
the Ambassador that the government is looking into purchasing 
existing mortgages from lenders, thus creating a secondary market. 
Such a step would inject liquidity into the economy, help compensate 
for the weak deposit base of the domestic banks, and avoid having 
the government or its institutions direct lending to specific 
sectors. 
 
ORDWAY