An illiquid diet

Does Kazakhstan's central bank view commercial banks with rose-tinted glasses?

The head of Kazakhstan’s central bank points with pleasure to today’s low ratio of foreign debt to the size of the economy, much lower than in the run-up to the financial crisis of 2008.  Kairat Kelimbetov estimates the ratio of Eurobonds to gross domestic product as 2.5%.  He regards this as a symptom of economic stability, reports a business weekly, Delovoy Kazakhstan.

Foreign money is not the only issue confronting monetary policy makers, and possibly not even the main one.  Another is “liquidity” – the ease with which we can spend money.  The ratio of illiquid money to liquid (specifically, the M3 money supply to the M1) is higher now than it has been since 2000 at least – even higher than in 2008, according to data from the National Bank of Kazakhstan.

Illiquidity concerns us because many commercial banks, knee-deep in mortgages and bonds, finance these long-term loans with short-term money.  As long as long-term borrowers faithfully pay interest until their loans come due, the temporal mismatch doesn't pose a problem.  But if they stop paying interest, then the commercial bank’s antsy creditors may withdraw their money in the short term, be they foreigners or natives.  This would leave the bank hard up for cash and may compel it to call in loans, a recipe for recession.

As it happens, the share of all bank loans that are delinquent has hung high in Kazakhstan since 2009.  If this share rises, and if oil prices continue to fall, then creditors to commercial banks may panic.  The rising illiquidity of money suggests that the consequences of the withdrawals may not be trivial.

Biking in reverse

The amount of delinquent loans (that is, non-performing loans, or NPL) has fallen by a seventh throughout 2014, Kelimbetov said. Setting aside BTA and Alliance banks -- as well as Kazkommertsbank, which acquired BTA’s bad loans from the government this year, allegedly for market share -- the NPL ratio should be 15% by January, he noted.  This is a little like saying: “With the possible exception of thieves, no one ever steals in Kazakhstan.”  This summer, the National Bank said the January target for the entire bank sector was 15%, reported Financial Times.  It took the Bank only four months to back-peddle. 

For the sector, the NPL ratio will fall to 10%, which is barely acceptable, by the beginning of 2016, predicted Kelimbetov.  The National Bank has been expressing similar hopes for more than five years. The truth is that the commercial banks are still trouble. 

However, a large M3-to-M1 ratio need not signal trouble.  It may even be a blessing.  Long-term investments in roads, water treatment and education may stimulate the long-term rate of economic growth more than would short-term loans financing household spending on televisions and vacations.   Bank defaults are only one possible consequence of illiquidity – but one worth bearing in mind.  –Leon Taylor tayloralmaty@gmail.com

References

Alevtina Donskyx.  Economika viuchennik urokov.  Delovoy Kazakhstan.  October 24, 2014.

Jack Farchy.  Leading Kazakh bank eyes foreign expansion.  Financial Times.  July 6, 2014.

National Bank of Kazakhstan.  Various data series.  www.nationalbank.kz .

Oksana Kononenko.  Kairat Kelimbetov:  ‘Fevralskaya devalvatsya tenge provedena s bol’shym zapasom.’  Panorama.  October 24, 2014.