Central banker blues

Does the National Bank of Kazakhstan have any credibility left?

In the summer of 2007, a bank run on Allianz Bank, an unusually aggressive lender, raised the curtain on a near-collapse of Kazakhstan’s banking system in the two years to come.  This week, Allianz faced another run.

In all, three commercial banks fell victim to a warning, apparently bogus, of impending bankruptcy.  It was distributed through the social networks, especially WhatsApp Messenger, reported Kapital, one of the better business weeklies in Kazakhstan.  Kaspi Bank lost a tenth of its deposits.  Almaty authorities arrested a former employee of Bank CenterCredit, said TengriNews.kz.   

An electronic rumor mill is hard to fight, due to what economists call an “information cascade.”  Here’s an example of a cascade.  Aigul, a teen, decides not to go to college.  It’s a bad decision, but her friend Boris doesn’t know that.  He knows little about the value of a degree, so just observing Aigul’s decision convinces him to skip college, too.  The two decisions persuade another friend, Gulnara, not to go either.  The chain reaction continues.  More and more people decide to forego college, so each additional person observing these choices becomes more and more persuaded that she should not go either.  Similarly, a false rumor may gain increasing credibility as it spreads through the social networks. For that matter, bank runs may also comprise a cascade.

People run on a bank because they fear that it doesn’t have their money.  The worrisome thing about a run is that they’re right.  The bank makes money by lending out yours.  Normally, this causes no problems, because the bank can satisfy today’s withdrawals with today’s new deposits.  But in a bank run, all depositors want their money at once.  To raise the cash, the bank must either call in loans early or borrow overnight.  If it calls in loans, then some corporate borrowers will go bankrupt.  This will reduce output and employment – leading, in other words, to a recession.  If instead the bank borrows overnight, then it will have to pay punitive rates of interest, weakening its balance sheet.  As a last resort, the bank can close its doors, but this very visible decision will probably prompt runs on other banks.

Running for the hills

To avert bank runs, the government insures private bank accounts.  In the last panic, in 2008, the National Bank increased the insurance to about $34,000.  The most unsettling thing about the unfolding crisis is that the insurance seems not to have diminished the runs.  People don’t trust the government – especially since the new governor of the National Bank, Kairat Kelimbetov, denied just a month ago that he would devalue the tenge.  As it turned out, his margin of error was about 20%.  (His predecessor, Gregory Marchenko, also denied that a devaluation would occur.  That was in June.)

None of this had to happen.  The National Bank could have started planning for a devaluation last summer, when it became clear that the exchange rate would exceed the Bank’s target.  In public pronouncements, it could have left the door open for an eventual weakening of the tenge.  The commercial banks could have shifted their wealth into dollars over time. 

Even now, the central bank can defuse the situation by announcing that it will increase deposit insurance and offer emergency loans to jeopardized banks at relatively low rates; and, if push comes to shove, declare a bank holiday.  The mere announcement of solid measures will soothe troubled waters.

What is the National Bank actually doing?  It’s begging people to hang on to their tenge.  This may have either of two interpretations.  One: The Bank regards the bank runs as trivial.  Two:  The National Bank can't do anything substantial about the runs, because it has lost control of the money supply (even though it probably hasn’t).  Under either interpretation, the National Bank's blitheness will only increase the runs.

The most likely denouement is that Kelimbetov will be replaced by someone with enough credibility to actually talk to the public.  Will this come in time?  –Leon Taylor tayloralmaty@gmail.com     

       

References

Gumarova, Chulpan.  50 ottenkov ‘chernovo vtornyka.’  (Fifty shades of ‘Black Tuesday.’)  Kapital.  February 20, 2014.

 

Lillis, Joanna.  Kazakhstan’s central bank urges calm amid post-devaluation bank run.  EurasiaNet.org.  February 19, 2014. 

Radio Free Europe/Radio Liberty.  Kazakh devaluation leads to bank run.  February 19, 2014.

TengriNews.kz.  Central bank governor on devaluation of the national currency, the tenge.  June 6, 2013.

TemgriNews.kz.  Kaspi Bank depositors withdraw $212 million in a bank run.  February 20, 2014.

TengriNews.kz.  Bivshy sotrudnyk Bank Tsentrcredit prechasten k SMS-atake na financovie ynstytuti.  (Former employee of Bank CenterCredit is connected to a social-network attack on financial institutions.)  February 22, 2014.     

 

Why 185?

Why did the National Bank of Kazakhstan devalue in such a large leap?

As soon as the central bank weakened the tenge by a fifth last week, commercial banks complained that they had not been privy to the secret, reported the business weekly Panorama. 

Some secret.  The tenge had been losing value against the dollar for three years.  When the exchange rate hit 153 a year ago, predictions abounded that it would soon go to 155, the maximum rate that the National Bank had said it would defend.  At that point, it would either have had to announce a new maximum rate to protect (i.e., to devalue) or make clear that it would draw upon new sources of dollars – like the national welfare fund – in order to hold the line at 155.  (To keep the tenge from weakening, the National Bank can sell dollars and buy tenge in currency markets, if it has the dollars.)  Tapping the Samruk-Kazyna fund would have whipped up a political storm.  The only reasonable course was to devalue.  The commercial banks should have seen that – everyone else did – and should have shifted their wealth into dollars accordingly.  The National Bank is not their guardian angel.           

The only surprise was that the Bank adopted 185 rather than 160 or 165 as the new maximum.  Had it revealed this in advance to the commercial banks, they would have promptly sold tenge and bought dollars until the rate on the street was 185.  The only difference between this scenario and the actual one is that the banks, and only the banks, would have profited by arbitrage.  We’d all love to have a guardian angel.

Still…why did the National Bank go to 185?

There goes the neighborhood

The usual explanation is that the Bank was just keeping up with the Joneses.  Ever since last summer, the central bank in the United States, the Federal Reserve, has publicly mused that it would eventually tighten monetary policy.  This would raise interest rates in the U. S. and might attract rich investors in the Third World who want to park their money somewhere profitable.  To buy dollars, they would sell the local currency.  The exchange rate for that currency, against the dollar, would rise.  Central banks in developing countries might as well prepare for the inevitable by devaluing now.  This way, they may be able to manage events rather than react to them.  They may gain credibility and avoid a free-fall in the currency.          

If this is the story, then it would seem more sensible to devalue in small steps rather than in one fell swoop.  We’re not sure just how a tightening of the dollar would affect international flows of wealth.  Yes, local currencies will weaken, but how much?  What makes 185 the magic number?  The very fact that observers treat the new target as a surpryz is a source of disquiet.

The good news in this tinderbox is that the market exchange rate homed in on 185 within two days of the Bank’s announcement.  The Bank has credibility, probably because its previous governor, Grigorii Marchenko, held the exchange rate close to the old target (150) for two years while restraining inflation to roughly 6% (not bad, by CIS standards).  We’ll see whether the new governor, Kairat Kelimbetov, can stick to his guns.  -- Leon Taylor, tayloralmaty@gmail.com 

References

Panorama.  Natsbank ‘udyvlen’ pretenzyyamy bankov.  February 14, 2014.  

Who appreciates a depreciation?

How might the new exchange rate reshape our economy?

Yesterday, the central bank of Kazakhstan cut the value of the tenge by almost a fifth -- the largest such adjustment in four years.  How might it affect the nation’s economy?

The most evident consequence – and the National Bank lost no time in pointing it out – is that exports should increase.  Foreigners will get a fifth more than before of our products, in exchange for their dollar.  And so they will buy more of our oil and wheat, eventually.

Unfortunately, “eventually” is the operative word in that last sentence.  Exports won’t rise right away, because, like imports, they are usually fixed under contracts lasting one to three months.  In fact, the most immediate result of the devaluation may be a reduction of net exports -- that is, of exports minus imports. 

To see this, suppose that export contracts are in terms of tenge.  Then the new exchange rate will not affect exports.  The contracts have already fixed the number of oil barrels that can be sold, as well as their tenge price-tag, so the devaluation will affect neither quantity nor price right away. 

Now suppose that import contracts are in terms of dollars.  They fix the number of cars imported, as well as their dollar price; but their tenge price will rise by a fifth.  So imports (measured in tenge) will increase, and net exports will fall.  The last time that the central bank devalued the tenge substantially, in February 2009, imports exceeded exports for most of the remaining year.  Admittedly, the global economy was in recession then, so we couldn’t sell many exports. 

Since net exports are part of gross domestic product – which is the annual value of production on Kazakhstani soil – the most glaring consequence of the devaluation may be an economic slowdown.  Ironically, the National Bank cited as one reason for the devaluation a current surge in imports, reported Tengrinews.

Of course, eventually, the trade contracts will expire, and the new ones will take the new exchange rate into account.  Net exports will then rise.  But this probably won’t happen for several months.

Hey, big lender

Meanwhile, the devaluation will jeopardize the wealth of anyone holding tenge assets and dollar liabilities.  The most obvious example is the commercial banks.  They are not as far out on a limb as they were in 2009, but to some extent they still finance long-term loans (denominated in tenge) with short-term borrowing (denominated in dollars).  Marginal banks may go broke.

Consumers want to know whether they will have to pay higher prices because of the devaluation.  Again, the tenge price of imported goods and inputs will rise, quickly and sharply.  This is not the time to be purchasing a Mercedes.  But the prices of domestic goods may prove more resilient.  Yes, a local meat producer may raise his price to match that of the imports.  But he may instead hold it steady in order to increase market share.  In time, he will raise his price, because the devaluation increases the foreign demand for his meat.  But don’t look for that to occur before summer.

Especially vulnerable to the devaluation are local college students.  Their loans and scholarships are in tenge, but the prices of their textbooks are in dollars.  Moreover, universities like KIMEP hire many of their professors from abroad.  To keep hiring, the schools will have to raise their salary offers in terms of tenge, and they will pass on this increase to students by raising tuition.  In short, a devaluation is almost as much fun as a root-canal operation.  –Leon Taylor tayloralmaty@gmail.com

                  

Notes

1.  Thanks to Aisana Bekisheva, Raymond Cheung, and Aigul Izbanova for conversations.

References

Yaroslav Radlovsky.  Currency devaluation in Kazakhstan.  Tengrinews.  February 11, 2014.  Online.

Call for papers

Central Asia Business Journal (CABJ)

ISSN 2073-5901 (Print)      

The Central Asia Business Journal, published by KIMEP University twice each year, promotes

understanding of business issues (broadly defined) in the region.

Central Asia is a fertile area for research.  It prospers from rich natural resources and high commodity

prices as well as from its location at the crossroads of East and West.  But its open economy is

vulnerable to such external shocks as the global financial crisis of 2008, and its Soviet legacy

complicates its transition to markets.

Authors may submit research papers, case studies, and book reviews as either completed works or as

abstracts and proposals.  We also invite students’ papers.  Refereeing is double-blind.

The journal is open to all methodologies, but it especially welcomes papers that are conceptually and

analytically strong and that relate to the real world.  Its interests include:

      

International accounting standards and taxation

Corporate governance

Financial and capital markets and industries

Market structure and efficiency

Human resources management

Leadership

International business and globalization

Business law

Marketing strategies and effectiveness

Tourism and the hospitality business

Logistics and supply chain management

Management information systems

Business cycles and economic development

Market integration and segmentation

Emerging markets

Institutional economics

Microfinance and development    

Multinational enterprises and business strategy

Natural resources and their internationalization

Nongovernmental organizations and entrepreneurs

Mathematical economics

Statistical economics

Risk and uncertainty

Deadline for completed work: March 15, 2014.  We try to give the author a decision in six weeks.  All manuscripts must be in English.

The Journal’s website is www.kimep.kz/CABJ. 

For further information, please write to the managing editor, Leon Taylor, at ltaylor@kimep.kz.

Rude Questions Department

Why does a private medical center in Almaty reportedly hold the Kazakhstani monopoly on DNA testing, undertaken by a Moscow lab, at a profit rate of 44%? --Leon Taylor, tayloralmaty@gmail.com

How cool is this?

Is Kazakhstan’s economy worse off than the government reports?

Kazakhstan -- which less than a decade ago was one of the world’s hottest economies -- is cooling faster than a bowl of borsch in a viga.

Or: Kazakhstan is rolling along with its usual cheery growth.

Take your pick.  The national agency on statistics tells both tales.

In a recent news briefing, KazStat announced that the economy was growing 6% per year, according to the business weekly Panorama.  Meanwhile, the agency’s online database tells a darker story.  Compared to 2012, for the period from January through October, Kazakhstani income grew only 2.4% -- the slowest rate since the financial crash of 2009, when the economy shrank by more than 3%.  (This is in terms of the amount of goods and services that the income can buy – a measure called “real income”.)  Per person, income this year grew by less than 1%.  Even the Europeans would grumble about a pace that torpid.

These are not revelations.  KazStat’s data have been showing a similar slowdown for all of 2013, in both the Russian and English versions of the database.  And its reports of nominal income – which is not adjusted for price changes – are consistent with those for real income. 

What’s going on?

Conceivably, both stories are right.  Statisticians measure the economy in terms of the amount of goods and services produced on Kazakhstani soil, called “real gross domestic product”.  This is not exactly the same as income earned by Kazakhstanis.  Some work in other countries, so their income does not show up in Kazakhstan’s GDP.  On the other hand, the contribution of immigrants to our GDP does not show up in Kazakhstani income.  In the oil and gas industry, foreigners build most of the extraction facilities, and much of the resulting income goes overseas.

Cooks and books

Still, it’s odd to see a drop of two-thirds in the growth rate of income and, at the same time, a substantial rise in the growth rate of GDP.  According to KazStat’s database, GDP fell one-half of a percent in 2012 and rose only 1.6% in the first half of 2013, compared to the corresponding period of the previous year.  One might suspect that KazStat is now gilding the lily and that, in truth, an economic slowdown continues. 

Circumstantial evidence supports this hunch:  KazStat’s estimates don’t add up.  The head of the agency, Alikhan Smailov, said GDP grew 6% over the period of January through November, compared to the same period for 2012, reported Panorama.  But the headlines on KazStat’s home Web page say the “short-term economic indicator” was an annual growth rate of 4.8% over the period of January through October this year.  To reconcile these estimates, GDP in November, normally too cold for outdoor work, would have had to have grown two and a half times faster than in the average (and warmer) month of 2013.  This is barely believable. 

So are KazStat’s headlines.  They report growth rates exceeding 10% for agriculture, trade and communications as well as of 7.5% for transport.  But growth rates were only 2.9% for construction, an economic bellwether -- and 2.3% in industry, which includes mining, the traditional engine of economic growth in Kazakhstan.  These are strange lapses for a supposedly robust economy, especially since these two sectors comprise from 35% to 40% of the economy. 

It’s hard to tell what’s happening in construction, because KazStat’s estimates are all over the map.  Compared to the corresponding period of a year earlier, output in this industry reportedly grew 3.1% in 2012, shrank 4.9% in the first quarter of 2013, and grew only .7% in the first half of 2013.  Either construction is a yo-yo or KazStat’s figures are unreliable.

Finally, KazStat’s latest estimate is out of synch with earlier ones.  The agency had calculated that real GDP per capita in 2012 grew only 3.5%, the slowest pace since 2009.     

Okun’s Law

Of course, statistical agencies correct their estimates as time goes by.  That’s normal.  But for an agency to tell simultaneously two stories as contrasting as these – hearty growth in GDP and stomach-churning decline in income -- is disconcerting.   

Finally, KazStat’s estimates flout economic principles.  Although the growth rate of GDP supposedly has risen about 6.5% since 2012, the reported unemployment rates for the two years -- for the nation and for individual oblasts – are virtually unchanged.  For the first three quarters of 2013, the national unemployment rate was 5.2%.  That was just a tenth of one percentage point lower than for 2012.  For no oblast did the unemployment rates for the two periods differ by more than a fifth of a percentage point.

This too is weird.  Usually, the unemployment rate moves in the opposite direction of GDP, and proportionally so.  After all, a growing economy creates jobs, cutting unemployment.  By a hoary rule of thumb, a fall in the rate of economic growth of two percentage points may raise the rate of unemployment by one percentage point.  For Kazakhstan, the year’s reported rise in economic growth of more than six percentage points would lower the unemployment rate by three percentage points.  Of course, this is just a rule of thumb, but the principle matters more than the point estimates:  A large change in the rate of economic growth should induce a large change in the rate of unemployment.  The latter should not stand still.

 

Anomalies also appear in the data across oblasts at a given time.  In 2013, the unemployment rate varied only from 5.6% (in the city of Almaty) to 4.9% (in Akmolinskaya and Aktubinskaya oblasts).  One measure of dispersion in these unemployment data -- the ratio of the standard deviation to the mean -- is only 4.4%.  But the corresponding figure for GDP growth rates is 68% (for the first half of 2013).  Are the unemployment figures even more bogus than the GDP ones?

Let’s lurk in the economic murk

Here's the point:  Foreign investors don’t want perennially rosy numbers.  They want the truth.  They already know that Kazakhstan has educated workers, some political stability and, definitely not least, oil and gas.  KazStat does not have to promise them the Brooklyn Bridge to get them to come.  To the contrary, the agency’s refusal to provide sound statistics discourages investors from committing their dollars for the long run.

KazStat could do a lot to help.  As other major providers of economic data, such as the World Bank and the International Monetary Fund, already do, it could document its figures with care.  Every spreadsheet available to the public should define in detail each data series and its unit of measurement as well as name the original sources. 

For foreign users, KazStat should clean up its English.  Users should not have to tussle with definitions such as this:  “Households’ monetary incomes represent the sum of the money resources received by household’s members in the form of a wages, the income of enterprise activity, social payments (pensions, scholarships, grants and other payments), percent, dividends and other incomes of the property, other monetary receipts.”

KazStat should provide balanced news briefings, noting ambiguities in the data.  And, of course, it should reconcile estimates.

Maybe KazStat will make a New Year’s resolution.  But don’t bet the farm on it.  – Leon Taylor, tayloralmaty@gmail.com

 

Notes

1. Viga is Russian for a blizzard.
2. According to KazStat, the annual growth rate in income fell from 6.9% in 2012 to 2.4% in 2013, for the period of January through October, compared to the same period in the previous year.
3. Here are calculations for the GDP growth rate in November.  In annual terms, the average growth rate was 4.8% for January through October but 6% for January through November.  Denote the average monthly contribution to annual GDP growth as Xi, where i indexes the month (1 for January, 2 for February, etc.).  Then X1 + X2 + … + X10 = 4.8%.  And X1 + X2 + …  + X10 + X11 = 6%.  Solving these two equations gives us X11 = 1.2%.  The average of X1 through X10 is 4.8% / 10 = .48%.  So the November contribution to annual GDP growth, compared to the average of the earlier 10 months, is 1.2% / .48% = 2.5. 
4. A well-known regularity in economics, Okun’s Law, holds that changes in the rate of unemployment is a linear function of changes in the rate of economic activity.  In particular, Y = a – bX, where Y is the change in the unemployment rate and X is the change in GDP (both changes measured in percentage points); and a and b are positive constants.  Clearly, dY/dX = -b:  An increase of one percentage point in GDP reduces the unemployment rate by b of a percentage point for any levels of the two variables.  Changes in X and Y are proportional to one another.   The American macroeconomist N. Gregory Mankiw gives a typical estimate:  Y = 1.5 - .5X.  In this model, a decrease in the rate of economic growth of two percentage points would raise the rate of unemployment by one percentage point.

Good reading

Mankiw, N. Gregory.  Macroeconomics.  Worth Publishers.  Seventh edition.  2010.

References

Agency on Statistics of Kazakhstan.  Various data series.  www.stat.kz

Oksana Kononenko.  BBP Kazakhstana viros na 6%.  Panorama.  December 20, 2013. 

Hot Havana nights

Does anybody really know what time it is?

Michael Dobbs.  One minute to midnight: Kennedy, Khrushchev and Castro on the brink of nuclear war.  Alfred A. Knopf. 2008.  426 pages.

In the Cold War, the most famous eyeball-to-eyeball showdown was the American naval blockade in the Cuban missile crisis of 1962.  This fame, of course, is circumstantial evidence that no eyeball-to-eyeball showdown occurred.  Michael Dobbs of The Washington Post provided the evidence.  Unlike prior historians, he charted the paths of the two Soviet ships carrying nuclear missiles with a 2,800-mile range to Cuba, 90 miles south of Florida.  On the day following President John Kennedy’s televised ultimatum, the Kimovsk and the Yuri Gagarin reversed course more than 500 miles east of the blockade, at the behest of Soviet Premier Nikita Khrushchev. 

Believing that a confrontation was minutes away, the secretary of state in Washington, Dean Rusk, had observed, “we’re eyeball to eyeball, and the other fellow just blinked.”  One hates to eviscerate a great quote like that, so no one did.  In the best-known account of the crisis, Thirteen days, Kennedy’s brother wrote that U.S. and Soviet ships had come within a few miles of each other.  John Stuart Mill would not have been surprised by the mass addiction to error: The tales that no one disputes, he wrote in 1859, are the ones most apt to be myths.

Dobbs, more interested in facts than in theories, may subscribe to a few urban legends himself.  He writes that the crisis did not erupt into war, because both leaders were prudent though ill-informed.  “[Their] initial reactions…had been bellicose.  Kennedy had favored an air strike; Khrushchev thought seriously about giving his commanders on Cuba authority to use nuclear weapons.  After much agonizing, both were now determined to find a way out that would not involve armed conflict.  The problem was that it was practically impossible for them to communicate frankly with one another.  Each knew very little about the intentions and motivations of the other side, and tended to assume the worst.  Messages took half a day to deliver….Once set in motion, the machinery of war quickly acquired its own logic and momentum.”

MAD math

I think that Kennedy and Khrushchev had the vital facts.  For each, the question was whether to launch missiles.  Suppose that Kennedy concluded that whether or not the USSR launched, the best American option was to attack.  Also suppose that Khrushchev concluded that whether or not the U.S. launched, the best Soviet option was to attack.  Then both leaders would have attacked, even though both would have preferred a joint peace.  Even had they spent all day on the telephone, reassuring one another of their commitment to peace, this would not have changed the logic of immediate attack. 

In reality, neither leader struck because it was neither’s best option.  An all-out assault would have left the rival with scores or hundreds of nukes to launch.  The certainty of retaliation deterred attack.  MAD worked.

Dobbs makes clear that Kennedy understood this irony.  When the Pentagon told him that one Soviet missile could kill 600,000 Americans, he noted that this would be more deadly than even the Civil War.  “As he later acknowledged, the 24 intermediate-range Soviet missiles in Cuba constituted ‘a substantial deterrent to me.’  He had privately concluded that nuclear weapons were ‘only good for deterring.’  He thought it ‘insane that two men, sitting on opposite sides of the world, should be able to decide to bring an end to civilization.’” 

That last sentence is a non sequitur.  What is truly disturbing – if not insane – is that a man sitting in Central Asia today can plant a dirty bomb in New York City without fear of an instant and proportionate retaliation. –Leon Taylor, tayloralmaty@gmail.com

Note

A few days after Kennedy’s TV speech, the spaceport in Kazakhstan, Baikonur, prepared to launch a missile to a U.S. metropolis like Chicago, Dobbs reported.  The only rocket available was the antiquated R-7, which had boosted Sputnik.  In October 1960, a more advanced rocket, the R-16, blew up on the launch pad, killing 126.  How another explosion, this time with a nuclear warhead of 2.8 megatons, might have affected the Baikonur environs is, fortunately, a question that never had to be answered, since the rocket was never launched.           

             

Good reading

Mill, John Stuart.  On liberty.  1859.  On line.

Schelling, Thomas C.  Arms and influence.  Yale University Press.  2008.  Readable game theory.

References

Robert F. Kennedy.  Thirteen days: A memoir of the Cuban missile crisis.  W. W. Norton.  1969.