VZCZCXRO4378
RR RUEHLN RUEHVK RUEHYG
DE RUEHTA #0016/01 0040245
ZNR UUUUU ZZH
R 040245Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1444
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE 0351
RUEHAST/USOFFICE ALMATY 0112

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 
 
ASTANA 00000016  001.2 OF 003 
 
 
¶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 
--------------------------------------------- - 
 
¶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. 
 
ASTANA 00000016  002.2 OF 003 
 
 
 
¶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 
--------------------------------------------- - 
 
¶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 
 
ASTANA 00000016  003.2 OF 003 
 
 
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