Economic Development of Kazakhstan and Policy of the National Bank at the Current Stage
Grigory Marchenko, Chairman of the National Bank of Kazakhstan
First of all, I would like to note that the current investment climate in Kazakhstan is proving to be the most favourable out of the last 9 years, from the date when Kazakhstan declared its independence. This is connected with the favourable internal and external economic conditions in 2000, and with the significant progress made by Kazakhstan in its transition to a market economy.
The development of the Kazakhstani economy during the first six months of 2000 has taken place against a background of a substantial revival in the world economy. In 2000, world economic growth is forecast at 4.75% (it was 3.3% in 1999). Macroeconomic and financial stabilisation are being observed in Russia, which remains an important trade partner for Kazakhstan. Russia’s economic growth during the first six months of 2000 totalled 8.4%, the inflation rate was 9.5%, and the devaluation of the Russian rouble (vs. US Dollar) was 3.9%.
We should name the significant growth in the price of oil, that is 21.9%, as one of the main events on the international commodity markets during the first six months of 2000. After a sharp drop in March – early April (due to increased OPEC’s quotas), prices for oil began growing, and in the middle of May the Brent price reached $28 per barrel.
The improvement in the general world economic situation, and in the neighbouring CIS countries, as well as the favourable situation on world markets, have encouraged positive tendencies in the country’s economy, which can be observed from late 1999.
As a result, for the first time during the period of market reform, GDP for the first six months of 2000 was 10.5% up. Also, the industrial, agricultural, and investment index of actual volume has increased by 16%, 5.5%, and 30.8%, respectively.
Inflation for the first 8 months of 2000 has reached only 5.2%, with year-on-year inflation being reduced from 20.1% to 10%. Intensification in positive anticipation of market participants was noticed regarding the short-term and medium-term exchange rates for tenge.
Such indices as trade balance, gold exchange reserves, deposits in the bank system, and official rates, have reached their best values after the National Bank introduced independent monetary and credit policy.
As a result of the continuing growth in world prices for oil and other raw materials, exports amounted to $4.4b during the first six months of 2000, which is twice as much in comparison to the first six months of the last year. The trade debit balance was almost $1.3b, exceeding the results of the preceding six months. The strengthening of external trade provided for a fundamental improvement of the current transactions account, i.e. the positive balance of the current account totalled $600m, in comparison with the deficit observed during the first six months of 1999.
Net direct investment flow during the first six months of 2000 amounted to $370m, while the country’s gross external debt as of 31st March, 2000, totalled $7.2b, which reduced from the beginning of the year by almost $768m.
The maintenance of positive tendencies in foreign trade has resulted in further improvements in the trade balance. According to preliminary estimates, the debit balance exceeded $1.3b over the first six months of 2000.
The favourable prognosis of the payment balance and the growth of international reserves were the reasons behind the National Bank’s decision to advance the repayment (in May 2000) of all its obligations to the IMF ($444m). As a result, despite another bonded loan at a sum of $350m attracted in May 2000, the value of the Kazakhstani external debt has not changed at the end of the first six months, in comparison with the value of the first three months.
The above-mentioned positive tendencies are expected to continue within the foreseeable future. This can be provided on the basis of a favourable international economic situation in the near future (3.9% forecast for 2001), the expected commissioning of the first phase of the CPC at the end of 2001 (which will open a wide path for Kazakhstani oil to the international market), political stability in the country, and the market reforms of structural changes within the Kazakhstani economy.
I am sure that for investors it is extremely important to have an overall concept of the monetary and credit policy being implemented by the National Bank of Kazakhstan, which will allow its long-term investment programme in the country to be effectively fulfilled.
The main task for the National Bank of Kazakhstan in 2000 is to maintain a low inflation rate (8-9% at the end of year) by means of regulating the monetary base.
The National Bank is following a policy of a freely floating exchange rate of tenge. Since the beginning of the year, a balanced condition, with insignificant fluctuations in the average weighted exchange rate, has been noted on the dollar exchange market. The average weighted exchange rate decreased 3.1%, and amounted to 142.52 tenge per US$1.
A sufficient flow of currency to the internal market allowed the National Bank to significantly increase its gold exchange reserves. At the end of August 2000, net gold exchange reserves reached a peak value for the period beginning with the introduction of the national currency, $2,104.0m (3.8% increase from the beginning of the year, or $583m).
In order to reduce the average level of market crediting rates, the National Bank has applied a policy of reducing the official refinancing rate. During the first seven months of the current year, this rate has been reduced from 18% to 14%, and minimal reserve requirements have been reduced from 10% to 8%. The banks feel almost no difficulties regarding a deficit of short-term liquidity or the reserve base restriction. During the first 7 months of 2000, a significant excess of liquidity has been observed in the banking sector, which has promoted, mainly, an increase in bank activities on the interbank market of ‘short’ money. At the same time, the yield obtained from interbank loans has changed insignificantly, and is being maintained at a low level. The formation of excess liquidity in banks has been grounded upon continuing growth of their obligations, mainly due to a growth in deposits from the general public and from companies.
Meanwhile, the deposit base of banks has increased 43.6% and reached 244.6 billion tenge. Chiefly, the growth in total deposits has been noticeable due to the increase of money deposited in thrift accounts. We highly appreciate this phenomenon, since these are fixed-term deposits that will be used as one of the main credit facilities.
A significant growth in the depository base of banks, especially in June and July, has resulted in an increase of bank activities in the crediting of the country’s economy.
Bank credits to the economy from the beginning of the year have increased 33.1%, and totalled 198.0 billion tenge. Increases in the share of intermediate and long-term credits from 49.3% to 49.8% has been observed due to increases of fixed-term deposits and extensions of their terms.
The average weighted fee for credits given in tenge has been reduced at the same time from 20.5% to 19.0% per year, and for foreign currency credits from 20.4% to 17.1%. Such a reduction in credit rates has been promoted mainly through decreases in the refinancing rate of the National Bank.
The fact that market participants are displaying a positive outlook in relation to inflation and the tenge exchange rate has resulted from the monetary and credit policy introduced by the National Bank.
It should be mentioned that the current surplus of the budget has allowed the Ministry of Finance to reduce amounts of internal borrowing and to follow a policy of reducing the yield from domestic public securities. This is being conducted against a background of increased medium-term treasury bonds: at present, sale at auction of treasury bonds in tenge with a two-year maturity has been recommenced, for the first time papers with a 3-year maturity have been issued, and the subscription for National savings bonds has been completed. A decrease in total profitability has been observed, along with a significant increase in terms of national securities.
I hope that it will be of special interest for investors to have some ideas about the current status of the Kazakhstani banking system.
I am convinced that Kazakhstan’s financial system, especially its banking system, has by this time met to a great extent all the requirements made of it, including those connected with prospects for implementing oil and gas projects.
The development of Kazakhstan’s bank system is sustainable enough. As of 1st August 2000, 47 banks were operating in Kazakhstan, including one bank with a 100% state share holding, one interstate bank, and nineteen banks with foreign participation.
Let me remind you that Kazakhstan was the first among the CIS countries to implement a programme for bringing the bank system up to international standards, which entailed the banks reaching standards for capital adequacy, assets quality, management, and accounting, as well as meeting requirements for information technology.
In accordance with the regulations on the transition of the second-tier banks to international standards, the first group for the transition is composed of 11 banks, and the second of 24. Moreover, four subsidiary banks are recognised as banks which meet international standards. The parent banks of these subsidiaries have been rated by one of the international rating agencies as not lower than A.
Currently, seven local banks also have international ratings. In particular, Standard & Poor’s international rating agency has given long-term B and B- ratings to the Halyk Bank and Kazkommertsbank, respectively. This is only a little lower than the country’s sovereign rating.
The total owned capital of the banking sector during the first seven months of the current year has increased 15%, amounting to 79.3 billion tenge. At the same time, the currency value of total owned capital has also increased (from $500m to $556m), which confirms an increase in the sustainable development of the banking sector.
Second-tier bank obligations have increased 19%, amounting to 322.2 billion tenge. The increase in bank obligations is grounded, first of all, on the growth of deposits made both by legal entities and individuals.
The continuing increase of total banks’ liabilities has caused an increase in assets (by 20.3%), which amounted to 410.4 billion tenge as of 1st August 2000.
The improved quality of advances portfolio during the above-mentioned period deserves special mention; the share of standard credits increased from 55.3% to 70.5%, and the share of shaky credits decreased at the same time from 39.2% to 25.4%.
The sustainable operation of the Kazakhstani bank sector is provided by its reliable payment system, which is approximated to international standards to the maximum, and meets all the requirements of the payment system. The payment system in Kazakhstan includes the interbank system of money transmission and a system of retail payments. The system of interbank money transfer, which has been introduced from January, is based upon the principles of the Swiss interbank system of heavy payments. The stability of the banking system under crisis conditions allowed the deposit base of banks to be preserved.
What also deserves mentioning is the fact that our bank system was one of the few among the CIS countries to successfully survive the financial crisis of 1998, which demonstrated to foreign investors its sufficient soundness. The National Bank of Kazakhstan’s strong requirements to increase of capital, plus other steps in the Programme for our banks’ transition to international standards, made it possible to almost painlessly experience devaluation, and to preserve the attractiveness of this market segment for foreign investors. This has also been confirmed by the fact that some large international banks intend to open their representative offices and subsidiaries in the country. In addition to the successful activities of ABN-AMRO Bank, such subsidiaries as Citibank, and HSBC are actively working here. Such famous international banks as Deutsche Bank, CCF, Commertzbank AG, ING Bank N.V., and others have their representative offices here in Kazakhstan.
In 1999, the banking law increased the allowable participation rate of foreign banks in the total registered authorised capital stock of banks from 25% to 50%. As of 1st August 2000, the share of foreign participation in authorised capital stock of local banks amounted to 28.7%. This means that currently there are significant reserves available for foreign participation in the country’s bank system.
Nevertheless, National Bank carefully ensures that only the most reliable foreign banks operate in Kazakhstan. According to our laws, no legal entity registered in any offshore zone can establish a bank in Kazakhstan. Moreover, any foreign bank has the right to open its subsidiary in our country only after its representative office here has been operating for one year. This requirement is not applied when a non-resident bank purchases over 50% of shares in an operating bank.
Recently, the National Bank has been paying more attention to attracting money into the bank system, with the aim of promoting favourable conditions for the bank to credit the economy.
We can say with certainty that our banks’ efforts to attract money from the general public and companies, as well as the National Bank’s operations to create an insurance system for fixed-term private deposits, have resulted in a significant increase of people’s confidence in bank system.
A guarantee (insurance) system of fixed-term private deposits has been introduced. In order to intensify the security and protection of banking secrecy for both individuals and legal entities, and to provide the proper operation of the bank system in the country, a law on banking secrecy was adopted. The law regulates the procedure of impounding money and other property from individuals and legal entities deposited in the bank, the suspension of payment transactions on banks’ accounts, and money withdrawal from accounts without the owners’ consent.
The National Bank is carrying out a dynamic policy to discover new mechanisms for providing credit for the real sector of economy.
A mechanism of refinancing banks has been introduced, and this is directed towards supporting the most competitive production. A bank consortium has been established with the participation of the National Bank for the joint financing of gold-producing companies. The banks participating in the consortium have obtained credits to the amount of $4.9m. Loans are given for 6 months with possible prolongation. The fee is set as a 6-month LIBOR rate + annual 2.25%.
The National Bank has developed the necessary normative and legal basis for introducing the circulation of bills. Currently, a list of first-class bill issuers is under preparation; at present it is composed only of Kazakhtelecom open joint stock company and NAC Kazatomprom closed joint stock company.
The introduction of a financial leasing system for crediting companies has great potential, first of all, for the supply of equipment to agriculture and small and medium-sized business. Our Parliament has already adopted the law on leasing, drawn up by the National Bank.
The National Bank has developed a bill on dwelling savings in the Republic of Kazakhstan, which has created good grounds for the development of such a financial institution in our country.
The regulations on credit societies have been revised, with an orientation towards the needs of small and medium-sized business.
The insurance markets, as well as the pension, deposit, credit, and securities ones are the main components of capital markets. However, unlike other markets, this one is insufficiently developed in Kazakhstan.
One of the main tasks set before the Kazakhstan National Bank at the current stage is the establishment of the insurance market in the country and the facilitation of its development. Many local banks currently operate in accordance with international standards, unlike insurance companies, which find themselves only at the beginning of their development.
Inaccessible foreign investments and the almost total lack of reliable information are the main reasons for the situation which has developed in this market.
A strong insurance market can provide solutions to the problems connected with a possible risk of deficit in pension accruals in cases of long life. First of all, it is intended to implement the necessary steps, within the next few years, in order to create a normative legal base that will meet international and other standards. This year we intend to adopt a new law on insurance and insurance business, which will include life insurance in addition to general provisions.
Major arrangements for developing the insurance industry in Kazakhstan will be carried out within the framework of the State Programme for Insurance Development in the Republic of Kazakhstan for 2000-2002. The National Bank has already outlined the Programme’s project.
Arrangements have been made to create regulations for the insurance market, to improve the supervisory and regulatory system of insurance companies, to increase the requirements of capitalisation, and to increase insurance reserves and the reliability of their placing. Great attention will be paid to voluntary and compulsory insurance.
I believe that I you towards a more complete and distinct understanding of the current situation in Kazakhstan, and the level of development of its financial system. It would be great if the knowledge of our financial system, its strength, will promote the co-operation of international oil and gas companies with the financial and credit institutions of this country.
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