Kazakhstan's Banks Feel the Pinch of Global "Flight to Quality"

Even Kazakhstan is not immune from the trembles that shook the credit markets worldwide following the crisis in the American market for subprime loans. Today, Reuters reported a “liquidity deficit” that Kazakh banks are facing after a rise in interest rate spreads on international credit markets. While the banks dismissed the lack of domestic liquidity as temporary, it clearly points to a systematic problem in Kazakh financial markets.

In the last few years, Kazakhstan experienced a significant boom in its banking sector that was fueled by rapid economic growth and increased investment in Kazakhstan oil and gas sector and, more recently, by availability of cheap credit on international financial markets. While initially Kazakh banks catered mainly to commercial clients and provided investment services, lately they expanded their services to include small business and retail to a much greater extent than earlier. While this shift in strategy led to some impressive growth numbers (especially with banks specializing in retail clients like Alliance Bank), it remains to be seen how much of this growth can be attributed to sound strategy and how much to temporary exploitation of abnormally cheap credit.

This development has not gone unnoticed by both credit rating agencies and, thankfully, Kazakhstan’s macroeconomic policy-makers. The National Bank and the Agency for Supervision of Financial Services (FSA) are concerned with this situation and have instituted a series of measures to curb foreign currency borrowing and local credit emission. They have planned an increase in the percentage amount of required reserves the banks are to hold (to be effective on August 27) and set limits in exposure to short-term liabilities to non-residents.

As a Moody’s report on Kazakhstan published in July states “it remains to be seen whether the aggregate effect of such new prudential norms will slow foreign currency borrowing and credit emission. Over the medium-term, these problems will abate as the rate of inflation falls and when and as local capital markets mature, providing investors with alternatives to speculative real estate transactions. Moody’s will continue to monitor the rate of foreign currency borrowing and credit expansion in Kazakhstan. In terms of Kazakhstan’s sovereign credit rating, it should be stressed that the government has ample resources to deal with any problems that arise in the banking system.”

While the liquidity issues that the banks were facing today seem to be a relatively minor and temporary problem, it clearly shows that the measures introduced by Kazakhstan’s financial authorities are necessary. Kazakhstan’s financial system, despite its rapid development over the last years, still remains quite illiquid and relatively undiversified even compared to markets like Russia and dependent on international financial markets. The latter has been a blessing until now but could turn into a curse if international investors and financial institutions continue their “flight to quality”. Thankfully, this issue is well known and the authorities have taken steps to decrease the likelihood of a serious crisis. And should a crisis really arise, the government would likely step in and contain it to prevent it from spreading to other sector of Kazakhstan’s economy.