The participants of the VIII International Conference on Risk Management, held in Almaty on April 19–20, discussed prospects for the global economy in a period of uncertainty. Some experts emphasized the improving of situation in the global economy, while others talked about the new threats. However, they all agreed that the life of global economy over the next five – ten years will not be peaceful.
Over 300 representatives of business and political quarters, leading economists and public figures from 40 countries, which were brought together by the conference organizer – “Eurasia” insurance company took part in the discussions. The speech of company’s Chairman of the Board, Mr. Boris Umanov, proved to be one of the most topical and interesting. Opening the conference, he stressed that the focus of the expert and the business community continues to be the situation with the sovereign debts of individual countries in the Eurozone.
“Today, against the background of recovery of Italy, the national debts of Greece and Spain cause serious concern of investors”, – said the speaker, noting that Europeans faced “an unprecedented, in contrast to previous generations, crisis”. However, the decline in living standards in Europe is not so deep that it has ceased to be "one of the most attractive places to live on our planet”. Mr. Umanov criticized the regional channels, which, in his opinion, try to revive the myth of the “decaying” West, speaking about high unemployment and deterioration of social services in Europe. “In our lifetime, we would hardly see a large number of guest workers from Spain or Greece, who seek job in Astana, Beijing or Moscow.”
However that may be, but in the past years developing countries, including BRICS states (Brazil, Russia, India, China and South Africa) became once again the “locomotives” of growth. The head of “Eurasia” insurance company thinks that this abbreviation is nothing more than a successful linguistic finding of the analysts of Goldman Sachs, because these countries have much more separating rather than consolidating factors. “Each of these countries wants to be friends with the partners within the block. Some of them succeed. In any case, they enter into contracts, trade turnover grows, but they have not yet come to the commonly agreed decisions. And I am afraid, that they will not make decisions in the nearest future”.
The Chinese model
If BRICS considered the motive power of the world economy, then inside of this unit there is its own “engine” – China, which now deals and interacts not so much with the BRICS countries, as with the United States. Moreover, the economic rivalry between China and the United States, according to Mr. Umanov, already transfers to the political plane. “Chinese economists pay for the whole pages in the American press, where they estimate fundamentally different economic and political prospects of the U.S. and China, openly declaring the superiority of their political system over the western”.
If the U.S. considers its democratic system as an end in itself, China, sees its management model as a means to achieve even higher national goals, including eradication of poverty and the strengthening of international influence. In turn, some BRICS countries prefer more the Chinese model.
According to Mr. Umanov, at the moment China is not a socialism “with a Chinese character” but “a giant pyramid of state corporate capitalism” in which the Communist Party acts as a “holding company on top of the pyramid”. At the same time the Politbureau plays the role of the board of directors, managing the entire system through a vast network of subsidiaries - the local party bodies.
However, today's China – it is not yesterday's Soviet Union, because its economy has become an integral part of the world economy, and Chinese export flooded all global markets, and Soviet Union could not even dream of it. At the same time the $3.3 trillion foreign exchange reserves of China make it more powerful and influential in real life than the huge, but an inactive nuclear arsenal of Russia. As a result its own model of governance allowed China not only to reach international influence, but also to attract a large number of followers in other developing countries.
However, Mr. Umanov called other members of the BRICS block “the supporting cast actors”. As for the near future, the focus of political analysts and economists will be namely the “political and economic prospects of competition between the Chinese state-corporate model and the Western liberal democracy”.
Recipes for “The People's IPO”
While speaking of Kazakhstan, the speaker noted that in conditions of high prices for oil and metals, our completely raw-material economy feels quite good. However, the favourable price situation on world markets hides “many of the shortcomings of our financial sector”. One of them is almost idle Kazakhstan Stock Exchange with an absolutely miserable trading volume. In this regard, an important event this year will be the start of the program “The People's IPO”, in which the population will be offered the minor blocks of shares in national companies. However, in opinion of the head of “Eurasia” Insurance Company, there is a risk that implementation of the program will not be effective, “hypothetically “The People's IPO” can lead to that future non-professional investors, wanting to take profits, will be forced to set foot on the slippery path of speculations in the stock market, where they will certainly suffer defeat, which would inevitably lead to disappointment in the very idea of the financial markets and stock exchanges”.
To prevent this, the national companies, whose shares will be issued on the stock market, even today “must learn to pay quarterly dividends”. If this happens, even if stock prices decline, their holder will know that he will be paid “good dividends”. Then the retail investors will choose this company and will remain with them for many years. Accordingly, the possible dissatisfaction of population with the work of our government will be decreased in the case of high volatility in share prices. Mr. Umanov says that another advantage of such step is that it is not usual to lay claims about their own bonuses and rewards to the top management of joint stock companies, which not only works stable and profitable, but also pays quarterly dividends faithfully and regularly.
Insurers are not the bankers
As for the banking sector, the head of “Eurasia” insurance company thinks that the time of big banks have passed. As an argument, he referred to the growth of the loan portfolio of second-tier banks over the past year. It turned out that the increase in lending by the top ten’s banks was 14%, whereas the same figure for the smaller players increased by 32% on average. “I think that time of the huge banks-monsters gone, – categorically stated Mr. Umanov. – While the big banks clean portfolios from the “bad” loans and wait for the beginning of operations of the Stressed Assets Fund, arranging verbal duels among themselves, small banks grow and prosper”.
In addition, in his opinion, the banks of the second and third tier are much more profitable then the players of the top ten. “Curse of resources discourages big banks, and administrative resources and the protection of the top kills their client-centered approach”.
Commenting on the situation in the insurance market, he said that, in comparison with the banking sector, insurers have survived the consequences of the global financial crisis “more successful”. Insurance companies continue to raise money, regardless of the market conditions. However, the insurance market faces another serious challenge: a total disregard for the insurance from the population. “The share of people who voluntarily insured themselves against the earthquake or fire without forcing from the banks is microscopically small. As in many post-Soviet countries, the population of Kazakhstan in the event of any large-scale disaster became accustomed to rely on the government aid”.
Paradoxes of the financial market
The speech of Mr. Serik Akhanov, the head of the Association of Financiers of Kazakhstan was also interesting. In his report he tried to identify the main development trends of the financial sector. First of all, he drew attention to the fact that, in contrast to the western banks focused on financing of the real sector, the second tier banks of Kazakhstan are mainly engaged in lending of trade and construction. He also noted that banks in Kazakhstan are “cut off from the primary sector”, referring this to “their low capitalization”.
At the same time the head of the Joint Stock Financial Corporation gave interesting figures on growth rates of lending in 2011. According to him, this figure showed “historical minimum” and amounted to 10%, and the dynamics of mortgage loans turned out to be even lower – at a level of 7%.
Except that Kazakhstan “daughters” of foreign second tier banks showed the most remarkable results. “The rates of lending growth in the big national banks ranged from 10 to 50%, the medium level banks – up to 200%, and some foreign banks – up to 3,000%”. Based on these figures, it begs the very obvious conclusion that the domestic second tier banks are beginning to lose more and more in competition with foreign players.
Another mystery, as says the head of the Joint Stock Financial Corporation, is that for the past twenty years, rates on deposits and financial instruments of the Ministry of Finance and National Bank are below inflation. “In fact, we operate the instruments with negative returns”, – he stated, with the assumption that the cause of this problem should be sought “in secret of exchange and accruing”.
As another paradox, Mr. Akhanov considered the fact that banks have accumulated excessive short-term liquidity, which is not used in the economy. On the one hand – this is a consequence of the crisis and the high requirements for borrowers, on the other – the lack of effective new projects. Therefore the main issue is how to sterilize the excess liquidity. This can be done using two mechanisms: the subsidy assistance and underwriting. “Only this will ensure the balance of a small number of borrowers and 8.5 million depositors of our banks”.
In conclusion, he noted that the banking sector of Kazakhstan from July 2007 has gone through several crises: funding, liquidity and refinancing. The second tier banks of Kazakhstan are now undergoing another difficult period, namely the crisis in the advances portfolio quality. The share of non-performing loans and problem loans of the fifth category is around 30%. The Fund for bad loans recently launched under the control of the National Bank is called to solve this crisis. As stated by Mr. Akhanov, banks have begun active negotiations for the transfer of their problem assets to this fund.
Five risks to growth
The central event of the conference was a speech of Mr. Nouriel Roubini, a professor of economics at New York University. In his report, he marked out a number of risks for the global economy and assessed their impact on Kazakhstan. But above all, the expert mentioned the positive trends. He pointed out the recovery economic growth recovery, and at the first instance in developing countries as the main positive. It is not known will it be short or long term, but the recovery is in progress, and has the U-shaped curve. At the same time, Mr. Roubini emphasized that the greatest growth potential remains in developing countries. This is partly due to the fact that they do not have a high national debt. In recent years, economic growth in these countries was 6% on average. The expert called as another positive factor a strong financial position of large corporations.
Further, he identified five main risks to the global economy: the problem of deleveraging (reducing the ratio of equities to debts), the high national debts of peripheral countries in the Eurozone, the unstable situation in the Middle East, the deceleration of economic growth China and the difficulties of U.S. economic recovery. All of these risks may adversely affect Kazakhstan as well.
Speaking of the first risk, he recalled that the recession of 2007–2008 was caused by the financial crisis, which in turn was the result of “a high debt and the leverage of private sector, including households, banks and partially, a corporate segment”. To solve these problems, the state injected significant resources into the economy, which allowed “only partially” to reduce problems in the private sector. However, said Mr. Roubini, the reverse side of these measures was “an increase in leverage of the public sector”. In these circumstances, the recovery will continue to be “slow and anaemic” because the private and public sectors have to cut expenditures, reduce scarcity of funds and rely more on their own financial resources. This means that within 5–10 years, the growth of the global economic and developed countries will be significantly below its potential level.
All of this according to the predictions of Mr. Roubini, would have a negative impact on the economies of developing countries, including China, which will suffer greatly in conditions of deceleration and slow recovery of the economies of the U.S., European Union and Japan”.
Commenting on the situation in peripheral Eurozone countries, Mr. Roubini said that they are experiencing a serious recession, and there is a possibility of its beginning also in the “central” European states. According to his estimates, the situation with the debt crisis in the Eurozone will not be improved in the short term, but the recession will only deepen. The economist explained such a pessimistic forecast by several reasons.
First, by the fact that European states are obliged to spend the austerity measures, cutting government expenditures and raising taxes. “All this is necessary in the short term, but there arises a vicious circle, when in conditions of recession, these measures lead to a reduction in aggregate demand and further deterioration in the economic situation”.
Second, the problems of Eurozone worsen by the high euro exchange rate, which negatively affects the competitiveness of European countries. “Today the rate of euro against the dollar should be lower by 20–30%, that is to say, the ratio should be approximately one to one. But this does not happen for several reasons. Therefore, the growth of competitiveness of the periphery of the Eurozone is a serious problem against the background of its high debt obligations. At the same time trade balance deficit does not hold out hope to improve domestic economic growth in the Eurozone”.
Third, the situation is worsening due to the existence of problems of European banks. “They have a sufficient level of liquidity because of support from the European Central Bank, but there is a shortage of capital and sources of its replenishment to comply with regulatory requirements. This leads to the deleveraging, divestiture of assets and reducing of lending activity of European banks”.
As the fourth reason, the economist called inflation risks caused by the price increase for primary resources.
And finally, the fifth reason for the negative forecast for the economic prospects of Eurozone is the development of the social and political instability, which will bear hard on the growth of confidence of investors and consumers. All this may eventually lead to a “fiasco of Eurozone”.
Regarding the situation in the Middle East, it could trigger a sharp rise in oil prices and this would bring benefit to the countries exporting raw materials, including Kazakhstan. At the same time, Mr. Roubini has warned that an excessive rise in oil prices may result in “destruction of demand” from the importing countries, causing a “severe shock” and the collapse in oil prices. Ultimately, this will cause slow down in the global economy or global recession. The possibility of negative scenarios of the developments, he said, will depend on whether will be or not the U.S. military campaign against Iran. In this regard, referring to its sources in Washington and the Pentagon, the expert made it clear that the American political elite has no consensus about the need for a military confrontation between the United States and Iran.