Where the money is

Why is Kazakhstan’s economy still spinning its oil-greased wheels?

Nearly a decade after the financial crisis, Kazakhstan’s economy has yet to work up a full head of steam. Its economy grew little more than 1% per year in 2015-6. It’s rebounding – it expanded by 3.6% in the first quarter of 2017 – but it has seen sunnier days.  From 2002 through 2008, the annual rate of growth (adjusting for price changes) averaged 8.8%; since 2008, 4.2%.

Oil is part of the story, of course. Black gold has the blues. The annual spot price of Brent crude – probably the best indicator for the long-run health of the global oil market – averaged $71 per barrel from 2002 through 2013 but only $65 since then (Figure 2).  Oil accounts for a fourth of Kazakhstan’s economy, even excluding knock-on effects.

But petroleum is not the end of the story. The growth rate of Kazakhstan’s economy has dropped steadily since 2006 (Figure 1), even though oil prices rose until 2012.  What’s up?

Real compared to what?

Well, entrepreneurs may not be taking risks, partly because banks won’t lend to them. According to the National Bank, bank loans in March dropped nearly 2% from the prior March, although the market interest rate fell from 14.3% to 13.7%. Loans to “nonbanking legal entities” (don’t you love the Bank’s English?) fell 15.6% despite a hack in the interest rate from 13.5% to 11.9%. 

From this pattern, you might think that the demand for loans is falling. But we must adjust the interest rates for inflation, since lenders care about what they can buy with their interest payments, not about the interest rate per se.  Since last year, the real interest rate has risen from  -.8% to 5.9% for all loans and from -1.6% to 4.1% for loans to firms.  No, today’s interest rates are not stratospheric; but neither do they represent free dough, as they did in 2016. Borrowing might have fallen because banks have raised their interest rates.

The banks are skittish because they are still groaning beneath the weight of bad debt. The share of loan volume that is 90 days delinquent is 10.7% (for Delta Bank, it’s 98%), up from 7.9% last July.  True, these shares pale in comparison to the bad old days of 2013-4, when they were 30% or more; but they are high enough for anyone’s blood pressure.  On a happier note, the National Bank says the capital adequacy ratio – which indicates whether the banks have set aside enough cash for emergencies -- has been rising steadily since 2014. But just to be on the safe side, it is preparing a $1.5 billion bailout fund.

(And, as always in Kazakhstan, we have intrigue. Halyk Bank, controlled by the family of President Nursultan Nazarbayev, has just taken over troubled Kazkommertsbank.  The government paved the way with gold, so to speak; in a $7.5 billion bailout, its “bad bank” bought up weak assets that KazKom had inherited from the late unlamented BTA Bank of 2008 fame.  But Kazkom’s capital adequacy ratio is less than half of Halyk’s.  The merger would claim more than a third of the bank market at first, although KazKom’s shedding of toxic assets will cut its size.) 

Sluggish lending is not unique to Kazakhstan. Around the world, economies are working off debts at glacial speed. In China, local governments have piled on so much debt that they can no longer safely borrow money to build roads, power plants and water treatment plants. The resulting Chinese slowdown could spell woe for emerging market economies. So could impending hikes in the US interest rate, since these may oblige central banks like Kazakhstan’s to raise their own rates to avoid losing funds to America. Higher interest rates may discourage people from borrowing to pay for college education and new factories – things, in short, that enable us to produce more over time.

A tale of two theories

Kenneth Rogoff, the former chief economist at the International Monetary Fund, thinks that debt overhang accounts for the lack of economic growth today, as it often has. Rogoff sketches a debt supercycle. In credit booms – that is, when lending soars – prices rise for assets like homes. Borrowers use these assets as collateral for more loans (“leveraging”).  When the boom busts, the cycle back-peddles. Collateral loses value, so banks call in loans to pay panicked depositors. People lose their homes and the recession deepens.

Not all economists subscribe to the theory of debt overhang. Lawrence Summers, who was secretary of the Treasury under President Bill Clinton, builds upon the ideas of early American Keynesians like Alvin Hansen to propose that demand is falling short of supply, partly because of demographics. As the population ages, workers retire, which reduces income. Also, the entry of women into the labor force is leveling off in the West, so it won't spur as much income as it had a few decades ago.

Who’s right? Both camps try to explain why real interest rates are low today (below 2% in most of the West, and often negative). Debt theorists say risk has risen, so people are not willing to borrow unless it's cheap. Stagnation theorists counter that trends in the futures markets don't suggest a rise in risk. After all, insurance against a fall in stock prices is getting cheaper. The real reason that interest rates are low is that creditors can't find borrowers. In any case, both sides agree that the world economy (especially the West) must absorb the excess saving – perhaps by building infrastructure – to ignite economic growth.

“The rest of the world is providing savings to the industrial world,” says Summers, “and the rest of the industrial world is providing savings to the United States.” The money isn't where it would do the most good – like in the pockets of Central Asian entrepreneurs. –Leon Taylor tayloralmaty@gmail.com

Figure 1.  Data sources: National Bank of Kazakhstan; Kazakhstan Committee on Statistics.

Figure 2: Annual spot prices of Brent crude in Europe per barrel.  Data source: US Energy Information Administration. 

Good reading

Olivier Blanchard et al., Progress and confusion: The state of macroeconomic policy. The IMF and the MIT Press. 2016. I based these notes on chapters by Rogoff and Summers.

References

Dmitry Belyanin. Troubled large Kazakh banks: To fail or to rescue? Notes from the Golden Horde. http://notes-from-the-golden-horde.blogspot.com/2017/07/    July 10, 2017.

Central Asia & South Caucasus Bulletin. Halyk Bank completes KazKom takeover. July 16, 2017. Page 3.

Central Asia & South Caucasus Bulletin. Propping up the banks. July 16, 2017. Page 10.

Kazakhstan Committee on Statistics. stat.gov.kz The source of 2017 GDP data used here.

National Bank of Kazakhstan. Information about owned capital, liabilities and assets.  Various issues.  nationalbank.kz The source of data on the bad-loan ratio; I used the July 1 report for each year. 

National Bank of Kazakhstan. Statistical Bulletin.  Various issues.  nationalbank.kz The source of GDP and banking data used here.

National Bank of Kazakhstan.  Status on compliance with prudential requirements on 01-06-2017. nationalbank.kz The source of data on capital adequacy ratios.

Reuters. Update 1-Kazakhstan announces $7.5 bln bailout of top lender Kazkommertsbank www.reuters.com/article/kazkommertsbank-ma-halyk-bank-idUSL5N1GS4NK   March 15, 2017.                                              

United States Energy Information Administration.  eia.gov  The source of oil-price data used here.