Where’s the silver lining?

Are the banks of Kazakhstan long on cash and short on chutzpah?


A stark lesson of the 2008-9 financial crash is that reckless lending in real estate can create a price bubble that perpetuates itself…for a while. The complement may also hold: A lack of lending inhibits future loans. The hesitation of banks to lend conveys a pessimism about the economy that eventually infects potential investors.

Real estate and construction loans still comprise a large share of the loan portfolios of some banks, including 45% of Kazkommertsbank’s and nearly three-fourths of BTA’s, reported the business weekly Delovaya Nedelya. This concentration contributed to Standard & Poor’s downgrade three weeks ago of Kazkommertsbank, from “stable” to “negative.” Real estate prices have fallen by half since the bubble burst in mid-2008, reducing the collateral backing the loans, which themselves are often delinquent, noted Standard & Poor’s.

In general, construction's share of all industrial bank loans in Kazakhstan fell steadily after March 2011, when it was 19.1%, and most sharply after October 2011, falling to 14.9% by January 2012, or 3.2 percentage points lower than in January 2011, according to the National Bank of Kazakhstan.

Is this cooling-off auspicious? The answer is unclear. A rising share of construction in the economy (measured as gross domestic product, or GDP) is not always troubling. In an economy expected to grow rapidly, firms may add buildings in order to house future inputs. At present, investors do not seem to anticipate the 10%-plus rates of annual economic growth that Kazakhstan enjoyed before the financial crisis. Adjusted for inflation, the value of new physical capital in Kazakhstan has grown slowly or stagnated for several years. This hardly signals great expectations for the economy. The IMF projects a rate of economic growth of 6% or so through 2017.

Perhaps the country is still digesting the effects of the construction bubble. Adjusting for inflation, investment in fixed capital (durable and immobile inputs) in Kazakhstan was the same in 2011 as in 2010. New floor area in Kazakhstan more than tripled from 2003 to 2008, from 2.1 million square meters to 6.8 million, before leveling off at 6.4 million square meters in 2009 and 2010, according to the national statistical agency.

The cities dominate new construction. Almaty and Astana account for 38% of all new floor area in the country. This statistic leveled off in Almaty in 2010, at 1.1 million square meters; but it kept rising in Astana, to 1.4 million square meters. Although construction loans endangered the banks in 2008, new floor area kept increasing in the cities and is growing slightly faster in the oblast surrounding Almaty than in the city itself.

Bank credit in Kazakhstan grew 15% over 2011 after stagnating for three years, noted the International Monetary Fund (IMF). The banks still have lots of money that they could lend but don’t. Instead, they park much of it at the central bank (basically, the banks’ bank). The National Bank of Kazakhstan held as much as 5.5% of their assets in 2009, when their dread of risk was understandable, and 3.1% as late as March 2012, according to the IMF.


Pay it again, Sam


Not all of this mattress-stuffing is due to timidity. Some banks can’t lend their excess funds to those short on money, because the interbank market is sketchy. Other banks can’t find good borrowers. Real estate and construction firms propose fewer projects than before the crash.

Finally, the banks are saddled with bad debt. As a share of all loans, “nonperforming” ones (no interest paid in 90 days) quadrupled in 2009 to 21.2%...and kept rising, to 31.9% by March 2012. For BTA, which the government took over, it’s 80%. Moreover, overdue interest has increased from 2% to 7% of all bank assets. For banks like BTA that are trying to recover from bankruptcy – the polite term is that they have “restructured” – the figure rose from 3% to 17%. This suggests that the bad-loan ratio is higher than reported, said the IMF. However, the bad-loan ratio varies considerably from bank to bank. For Halyk, it is 8.3%, said Standard & Poor’s.

In general, the banks’ lack of lending renders them unprofitable. Their rate of return on assets was zero or negative from 2008 through 2010 and was only 1% in 2011, reported the IMF. In addition, a measure of the banks’ inability to cover bad loans – the assets-to-capital ratio – has been rising for more than two years.

“In the end, restoring the banking systems’ health requires recapitalizing viable banks and restructuring or closing unviable ones,” writes the IMF (wisely neglecting to define “viability”). “Capital shortfalls [roughly, the lack of money on hand to cover bad loans] represent public contingent liabilities, given the need to protect depositors and the fact that [Samruk-Kazyna, a government holding company] is the biggest shareholder in several large banks.” The capital shortfall for BTA alone is 2.5% of GDP. The government’s “Too Big to Fail” policy may be leading to another: “Too Big to Do Anything But Fail.” – Leon Taylor, tayloralmaty@gmail.com


Good reading

International Monetary Fund. Republic of Kazakhstan 2012 Article IV consultation. 2012. www.imf.org


References

National Bank of Kazakhstan. Statistical bulletin. Various issues. www.nationalbank.kz

Reuters. TEXT-S&P revises Kazkommertsbank's outlook to negative. July 31, 2012. Online.

Semen Skarga. Kazkommertsbank prodolzhaet “zarivat’sa” v nedvyzhymost’. (Kazkommertsbank continues to “bury itself” in real estate). Delovaya Hedelya.  August 10, 2012. Page 1.

Genuine coin of the realm

The contents of the envelope were thousand-dollar bills, smooth and stiff and new. Spade took them out and counted them. There were ten of them. Spade looked up smiling. He said mildly: “We were talking about more money than this.”

“Yes, sir, we were,” Gutman agreed, “but we were talking then. This is actual money, genuine coin of the realm, sir. With a dollar of this you can buy more than with ten dollars of talk.”


I think of that passage from Dashiell Hammett’s classic detective novel, The Maltese falcon, whenever I hear happy talk about Kazakhstan’s allegedly resurgent economy. The usual story is this: Because foreign investors, in such surveys as Ernst & Young’s, say they believe in Kazakhstan, the nation will surely attract investment dollars that will pump up its economy. That’s not even five dollars of talk. Let’s look at what investors actually do.

Since the financial crisis of 2008-9, investment – which is the addition to manmade inputs of production -- has stagnated in Kazakhstan. Adjusted for inflation, the value of annual investment in fixed (i.e., durable) capital here was 1.8% lower in 2011 than in 2008. An index for the amount of physical investment in Kazakhstan fell steadily, and by nearly a fourth, from 2005 through 2011. Unfortunately, the national statistical agency, which publishes the index, is habitually careless and nowhere explains how it constructed the index or even defines it. But the index conveys a general sense of stagnation. Over the seven-year period, it fell in every oblast and in Almaty.

The exception was Astana, where the index rose by 15% over the period. This may partly reflect the stability of spending by the national government, which could attract lobbyists. As a share of gross domestic product (GDP), government spending in Kazakhstan peaked at 26.9% in the crisis year of 2008 and since has held steady at about 24%, according to the International Monetary Fund. By global standards, Kazakhstan’s government is small, as measured by its share of GDP; but its concentration in Astana makes the city a convenient target for investment. From 2003 through 2011, the real value of annual investment in fixed capital in Astana rose 240%.

Compared to that in Astana, investment in Almaty is struggling. From 2003 through 2011, the real value of investment in fixed capital rose only 75.7%, the second-slowest pace of the 16 areas in Kazakhstan. This annual investment had been about a fourth higher in Almaty than in Astana – until the financial collapse of 2008-09. Astana rebounded; Almaty didn’t. In 2011, investment was 38% higher in Astana than in its older sister city.


Great expectations?

Investment is based on market expectations; for example, a firm will expand its factory only if it believes that more buyers each year will demand its products in the future. Because expectations are ever-changing, investment anywhere is volatile. But it may introduce instability especially into rural oblasts, where the economic base is small. Of the 16 areas of Kazakhstan, from 2005 through 2011, the index of physical investment fell most sharply in the oblasts of Atyrau (38.7%), in the oil-producing region of the Caspian Sea; Kyzylorda (37.4%), east of the decimated Aral Sea; and of Zhambyl (40.9%), a low-income farming area north of Shymkent. Over the period 2003-11, the volatility of the investment index in Zhambyl oblast – where the Asian Development Bank and others are financing a road project worth several hundreds of millions of dollars -- was more than twice as high as in any other region; it also had the highest annual average of the investment index in that period.

In the oblast of South Kazakhstan, the value of investment in fixed capital increased eight-fold. In volume, however, physical investment there fell somewhat more sharply than was average for the nation – by 28% from 2005 through 2011. Perhaps the value of a new unit of fixed capital is rising sharply in the oblast.

In terms of investment, the most quiescent oblast is a rural one -- West Kazakhstan. Only in this area did real investment in fixed capital decline from 2003 through 2011, by 37.9%. It also had the lowest annual average of an index of physical investment from 2005 through 2011.

Judging from what they do – not what they say – real investors are only cautiously optimistic about Kazakhstan and are most enthusiastic about the prospects for political spending. – Leon Taylor tayloralmaty@gmail.com





Notes

All statistics used here are from the national statistical agency unless attributed otherwise.

I used the Consumer Price Index to adjust for inflation, since the CPI measures the opportunity cost of investment in terms of consumption bundles foregone.


Good reading

Dashiell Hammett. The Maltese falcon. 1930.


References

Aleksandr Bogatik. Kazakhstan’s Zhambyl Oblast faces stagnant economy. centralasiaonline.com . July 27, 2010.

Asian Development Bank. CAREC Transport Corridor 1 (Zhambyl Oblast Section) [Western Europe-Western People`s Republic of China International Transit Corridor] Investment Program - Tranche 4 : Kazakhstan. Online.

Economywatch.com . A compendium of economic statistics.