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 KAZAKHSTAN International Business Magazine №1, 2011
 Rescue of Large-Scale Business. The Government is Ready to Help
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Rescue of Large-Scale Business. The Government is Ready to Help
 
Sergey Gakhov

The government of Kazakhstan started the year 2011 with presenting a number of economic initiatives at once. Among them, there are the Productivity 2000 program and programs related to support of residential construction, employment of the population, development of agriculture and development of IPO among the population. The acme of heavy activities of the Cabinet of Ministers was the program of post-recession recovery which provides for the recovery of large backbone enterprises and parallel cleaning of the bank portfolios from bad loans.

It is known that today a considerable portion of domestic enterprises are experiencing hardships with repayment and servicing of the loans and bond issues. This engenders risks of bankruptcy, failure to discharge obligations before the creditors, investors and partners, and negatively affects the tax proceeds and quality of the banks’ loan portfolios. In its turn, the worsening of the second-tier banks’ assets leads to increased provisions, losses, pressure on the capital, and, as a consequence, to reduction in the possibilities of crediting the real sector of the economy. Finally, all these factors are a hindrance to economic growth.

To break this vicious circle, in 2010 the government approved the Business Road Map 2020 program. One of the three directions of the program provides for the recovery of small and medium businesses through a mechanism of loans subsidizing by the state. The companies with a debt of no more than 3 billion Tenge are welcome to take part in the program. Regarding our raw material giants and state-run companies, they were able to keep solvent due to the access to funds received by the government through the inter-governmental loans.

At the same time, large businesses engaged in the processing industries were left outside of the government support. Meanwhile, according to studies of the Zertteu Group carried out under the NB500 project, now a half of the large and medium enterprises of the non-raw material sector are “suffering” from a high debt burden. 75% of the companies covered by the studies have an acute need in the principal debt restructuring; 47% have a delay of the loan servicing; while 50% have insufficient operating profit even for servicing of payments of the interest on loans. In the opinion of the Zertteu Group, high debt burden had transformed long ago from the level of a certain company to the sectoral level, and taking into consideration the consequences for the banks and the entire system of financing – to the macroeconomics’ level. In this situation, speaking of business as that coming to the growth stage and of successful implementation of the Accelerated Industrial and Innovative Program loses any sense.

Following the above, on February 11 at the congress of the Nur Otan party the Head of the State gave a commission to the government in collaboration with the National Bank and the Financial Supervision Agency to develop a program of post-recession recovery. The solving of the given task has to be carried out in two directions. The first one is seen to ensure the recovery of competitive large and medium enterprises, and the second one – of the financial system.

For those whose debt is more than 4.5 billion Tenge

The first part of the program, of which the Ministry of Finance was in charge, was approved by the government in the record shortest period of time – on February 15. This part of the program was presented for consideration of the representatives of businesses and a panel of experts at the National Business Forum Winter 2011, held on February 28 in Astana.

Prime Minister Karim Massimov in his welcoming and opening speech at the Forum told that in the last 3–4 years a relatively constructive dialogue was built up between the government and private business structures. “I believe that the creation of the competitive business community and Kazakhstani competitive companies is a thing without which our country will not be able to move on in the future. Since business one more time proved its vitality in the period of recession, so we are on the right path.” The spot measures taken by the government helped mitigate the most acute consequences for the enterprises and banks. However, in today’s agenda of the day is the issue of post-recession development; the latter thing is impossible without solving the problem of bad loans. Speaking of the recovery program, the Cabinet of Ministers Head emphasized that although in the discussion of it there were hot debates and different opinions were expressed, the developers of the program did manage to find an optimum solution. “I believe that we together have a great opportunity to consolidate the work and move forward”, – the Prime Minister said.

Vice Minister of Finance Andar Shukputov shared the details of the program. He announced that the recovery program will cover those competitive enterprises whose indebtedness exceeds 4.5 billion Tenge. In case if an enterprise, matching the above-said criterion, is part of a holding company by the cluster principle, then all in the group of the holding company can participate in the program. Those companies whose indebtedness is less than the indicated threshold, can use the state support offered under the Business Road Map 2020 program, in which the level of allowable debt will increase from 3 billion to 4.5 billion Tenge. 

According to Mr. Shukputov, the new program for large-scale business is not mass by nature. In the course of its implementation it is supposed to recover some 30-50 backbone enterprises. Moreover, since the given program is short-term for the period of 2011–2016, the possibility to enter it is limited by the current year. So who is not on time is late. In the future, those companies which restore their solvency will be able to continue taking part in the state-run Accelerated Industrial and Innovative Development and Productivity 2020 programs.

The major principles of the post-recession recovery program are voluntariness and participation of all the parties on a parity basis. “No one will force anyone to enter this program, since companies will file applications for participation in the program themselves. The parity means that the measures have to be implemented by joint and comparable efforts of the creditors, owners and the state, not only at the expense of public funds”, – the Vice Minister said.

Large and medium businesses, having the status of backbone companies, can take part in the program. They include also those to which before January 1, 2011 the reinstatement procedure was applied under the court judgment as per the Law on bankruptcy. With this, enterprises engaged in the mineral production sector and those manufacturing alcohol and tobacco products are not allowed for participation. Besides, the national managing holding companies, national companies and their subsidiaries, and legal entities with participation of foreign capital cannot rely on the help of the government in the framework of the given initiative.

As a first step, the enterprises that went through selection will have to engage a consulting company, to be selected by the committee of creditors for analyzing the financial condition and working out the recovery plan of actions. The government undertakes to co-finance 50% of the payment to the consultants for services, but no more than 35 million Tenge per program participant. “In principle, it is possible not to attract a consultant at all, if a court reinstatement procedure was applied against the program participant, as well as in a case when there is the principal creditor to whom the debtor owes more than 85% of the outstanding debt. If so, the recovery program of actions has to be developed by the participant enterprise on its own jointly with the creditor.”

The recovery plan will contain particular measures on recovery of the enterprise’s solvency, both from the side of the company’s owner and its creditor, and the state. “The support from the side of the creditors is clearly set forth, and we suppose this will be the writing off of a part of indebtedness (the principal debt, interest and penalty), alteration in the repayment schedule and periodicity of payments, additional funding and other methods.” The major mechanisms from the side of the owners should be the increase in the equity capital, optimization of business processes, and so on.

In its turn, the measures of state support involve the subsidizing of the interest rate on extended loans, credits and leasing, of the bond coupons placed in the Kazakhstani Stock Exchange. The term of subsidizing will be to 5 years with an interest rate of 7% p.a. The final interest rate, taking into account the subsidies, shall not be lower than 7%. Besides, those enterprises covered by the recovery program can be given a deferment in payment of taxes and other mandatory payments to budget for a period of up to three years, tax preference and assistance in search of the strategic investor. If the products produced by the enterprise have a good market in the quazi-state and state sectors, the situation can be like this that a guaranteed order would be placed for a period of to 4 years. Also, the policy of placing the national companies’ funds on the deposit accounts at the banks, considering for their participation in the recovery program, is agreed.

The source of financing of the program from the side of the state will be the republican budget 2011–2016. In particular, Mr. Shukputov informed that 8.8 billion Tenge were laid in the revised budget for the current year; this amount will go for “payment to the consultants for services and for preliminary work”. In the future, in the development of relevant budgets for every year, the amounts will be adjusted. “We already determined the potential circle of the participants, and by preliminary estimate, even in the most pessimistic scenario, i.e. if all the potential participants are covered by the program, and the plans are developed for the maximum period of 5 years, and they all need subsidizing of the interest rate, then the maximum amount of the government spending will be 145 billion Tenge.” With this, the government officials hope that even a lesser amount will require from the government – to 80 billion Tenge.

The recovery supervision council headed by the Prime Minister will be set up to exercise control over the recovery plans implementation. The working body, presented by the Ministry of Finance, will be carrying out yearly monitoring of the progress of the program implementation. As a result of this program the government is going to recover solvency and raise the financial potential of some 30–50 enterprises with reserving there of not less than 70% of existing jobs.

Will you read out the entire list

The representatives of businesses and banks took direct participation in development of the new program. Thus, their opinions with regard to the quality of the program were of more complementary nature. In particular, according to the Kazakhstani Entrepreneurs Forum Chairman Raimbek Batalov, “in the last ten years there was no sign of so well-coordinated work with the public agencies, including the National Bank and the Financial Supervision Agency, like this time”. He confirmed the statements of the officials that today the mechanism of the government-and-private partnership started operating effectively, and many wishes and remarks expressed by the businesses were taken into consideration. “Now the development of programs without such healthy cooperation is impossible. No pretentious approach should be here, since the matter concerns the “vitality or death” of entire companies within the sectors.” Along with that, Mr. Batalov paid attention to the fact that it is extremely important to synchronize the recovery programs with those programs aimed at the development of the sectors and territories. “Now this is important as never before, since we are already a part of the Customs Union, and have almost become a part of the Common Economic Space. The sales market expands for us and we have to have both feet on the floor, raising competitiveness of business so that this all will become a possibility, not the contrary”, – he summed up.

The Kazakhstani Financiers Association Chairman Serik Akhanov believes that the program, in general, is unique by nature. “Only our model provides in parallel and simultaneously for the full-featured recovery and cleaning of the banks’ and industrial enterprises’ balance sheets. From the viewpoint of the economic policy, this is coordination and harmony between the banking and industrial policies. I believe we have reached such a compromise at the given stage.” Also, he paid attention to the wide range of financial instruments in operation: There will be seven such instruments from the side of the banks, eight more from the businesses, and six more from the state. “The most important thing is that for the first time in our financial history not only the subsidizing of the interest rate on loans, but on leasing and coupon commission on bonds as well, is applied. There is no similar practice in any country of the world.”

The very fact of the emergence of the program is an undoubtedly necessary step. The point is to what extent this program is timely. The Kazakhstan Economists Association Chairman Oraz Zhandosov told that in the last two years there were numerous relevant forums and debates held so that the fact of “real recovery either occurred, or will never occur in the future”.

One more aspect the forum participant put an emphasis on was the lack of clear criteria of how an enterprise will be referred or not referred to that having the status of potential participant of the given program. How this will be measured, how competitive the company is; what the definition “a backbone enterprise” (say, at the level of the state, region or city) will mean, and what parameters will be the basis for assessing its importance for one or another sector of the country’s economy?

The government places a stake on voluntary participation; however, in the opinion of experts, the principle “those who were going to come have come” in the given case is not correct. The public agencies have to develop a particular and objective list of the projects beforehand, with attraction of the private sector, banks and independent consultants. In fact, the priorities have to be given by the Ministry of Industry; however, according to Mr. Zhandosov, in the course of discussion of these issues he had the feeling that “the ministry had had no comprehension at all of what companies by the sectors of the economy are the key ones from the viewpoint of the market shares, growth potential, etc.”.

The bankers are also interested in developing a list of the program participants in the shortest possible time. In particular, according to Mr. Akhanov, the financiers association had already raised a question as to the development of a backbone enterprises list for our economy. Further he asserted that there is a so-called Rau List that was developed on the basis of the technical audit results of 200 enterprises which will be included in the programs of Accelerated Innovative and Industrial Development, modernization and so on. Accordingly, only 30–50 of them will be able to go through the recovery procedure. “It is the truth that we, the banks, had provided our own list, and when I looked at these two lists, there was no matching… a half of the enterprises, figuratively speaking, were not our borrowers.”

In connection with this, the forum organizers believe that the first step in filling the lack of information on business and increasing its quality could become the launch of a large-scale government-and-private studies project, the results of which could be the ground to rely on in the modification of the post-recession recovery program.

Banking issue

The second part of the recovery campaign involves the solving of problems, related to the credit portfolios of the banks. On the one part, the situation with liquidity of the second-tier banks has fully stabilized, and there is practically no demand for the National Bank’s resources. “In the last year, not one of the banks applied to us for additional liquidity, except for that support addressed to those banks under restructuring”, – The National Bank Deputy Chairman Daniyar Akishev said. As of February 25, 2011 the amount of the second-tier banks’ reserves in the instruments of the National Bank is estimated at 1.8 trillion Tenge, or $12.5 billion.

On the other part, the improvement of the situation in the banking sector was expected to naturally lead to the increased credit expansion by the STB. However, in 2010 the crediting of the economy reduced by 0.6%, and one of the obstacles is the “high level of bad loans in the balance-sheets of the banks”. In view of the above, the National Bank and the Financial Supervision Agency in cooperation with the financiers association are developing a two-level system on buying out the distressed assets, which is seen to become the basis for the second part of the recovery program.

The first level of the system provides for the setting up by the banks of specialized financial companies (SFC) of four types. In the SFK of the first three types the distressed assets, related to the developing projects and real property, will be transferred. The fourth type of the SFC will be managing the “toxic” banking assets, received in the crediting of the real sector of the economy. Support provided by the state here will be like that that by creating the SFC the banks will get the possibility of depreciating their provisions, stage by stage creating them within 5 years, while the enterprises-debtors will get a deferment on repayment of the loans by converting them into bonds.

The second level involves the setting up of the new Distressed Assets Fund, or so-called DAF #2, which will be buying out with a discount distressed assets from the banks with their subsequent restructuring for the companies-borrowers. The funds for the DAF #2 operation will be received from the issue of the Fund’s bonds. The banks themselves will buy 33% of the total issue volume, pension funds 33% more, and the state in person of the National Bank 34% more. The yield on the DAF bonds will be different. “For the pension funds it is provided that these will be the senior bonds, senior debt, i.e. the repayment on it will be guaranteed by 100%, and the rates on it will be provided at a level higher than that of inflation. The yield on the bonds for the banks will be higher, taking into consideration that the risks of failure of repayment will be higher. So, depending on the fact of who will be buying them, different yield and different guarantee of repayment will be provided”, – the Financial Supervision Agency Deputy Chairman Kuat Kozhakhmetov explained.

By estimate of the regulator, to 900 billion Tenge of distressed loans in aggregate are likely to be transferred to the DAF #2 and SFC. Of them, 600 billion Tenge are related to real property. “This is almost 10% of the total loan portfolio of the Kazakhstani banks, while the amount of the released provisions will be some 7%.” With this, in the opinion of Mr. Kozhakhmetov, this amount is likely to increase, even considerably. This will allow the banks to improve their capitalization and will give the possibility of new crediting, including of those borrowers which will be transferred to the SFC.

Along with that, by recognition of the program developers, despite the fact that the basic principles of the layout are set, there are many issues remaining which require more detailed examination and coordination. According to Mr. Zhandosov, the main problem here which impedes the process is that fact that the state is planning to invest the taxpayers’ money in recovery of particular private facilities. In such a situation the most difficult task is to achieve the unbiased evaluation of the assets.

Some spokesmen of the businesses paid attention to the moral risks of provision of the next in the row portion of the state support to the banks and their owners, which in the pre-recession period were pursuing a too risky credit policy. Kuat Kozhakhmetov announced that the main idea of the recovery program is, most of all, the saving of enterprises of the real sector of the economy, not the banks. “We are not going to save the banks. We were already saving the banking system in 2008, 2009 and 2010, when we carried out restructuring.”

In his turn, Mr. Akhmetov, calling himself a professional lobbyist of the banking system, commented on the moral aspect of the question in that way: “When the economic growth took place, when we were in the first top five countries with a 10% growth, no one criticized the banks that they were crediting construction, trade and real property. Thus, I find this question complicated: At that time the country was saving not the bankers, since the bankers just carry out management of others’ money. If you do not repay the loan, you do not ruin the banker’s life, you ruin the depositor’s life.”

All would be good in these judgments, except for one thing: How to explain to the businessmen on what ground in the very beginning of the economic recession the banks (so “warm and fuzzy”) unilaterally raised by almost twice the interest rates on the extended loans? Seemingly, they were pushed by a disinterested wish of caring about their depositors.

Even today, the actions of the STB raise many questions. According to the Damu Entrepreneurship Development Fund Head Lyazzat Ibragimova, in the course of operation of the fund under the Business Road Map 2020 program, it was found that one of the main reasons of the current critical situation of the enterprises is the fact that they have a sharply increased principal amount of the debt, following capitalization by the banks of their interests on the loan and penalties in arrears. “So, the economic logic of the bank is not clear. The bank cannot get back even 20 Tenge, figuratively speaking, but it turns them into 25 Tenge and then tries to find out ways for repayment”. Speaking of the measures taken by the banks with regard to the enterprises that are covered by the Business Road Map, Lyazzat Ibragimova cited the following statistics: 47% of the projects were provided a deferment in repayment, 10% more projects were provided soft lending, and 43% more projects were not covered by the banks at all for any amendment. Simply part of their interest on the loan is subsidized now by the state.

Judging by the comments, the key problem in the implementation of the post-recession recovery program will become the search of the balance of interests of all the interested parties, as well as the working out of a common understanding of mechanisms, goals and tasks of the planned recovery. With this, the major “discrepancies” in the position of the banks, businesses and the state, lie, first of all, in the plane of trust and moral risks.

 
 
 
 


Table of contents
Peaceful Atom of Kazakhstan  Sergey Smirnov 
New milestones of JV Betpak Dala   Yuri Alexandrov  
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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