Belyanin on troubled banks in Kazakhstan

https://notes-from-the-golden-horde.blogspot.com/2017/07/troubled-large-kazakh-banks-to-fail-or.html.

Sky high?

Are interest rates in Kazakhstan excessive?

In Kazakhstan, interest rates generate interest in more ways than one.  Kazakhstanis have long complained that the central bank sets interest rates so high that they discourage borrowing and consequently economic growth. Youths cannot afford loans for tuition, so they don’t go to college; the minute that they begin working, their skills are obsolete. Firms can’t afford loans for modernizing their plants. In South Kazakhstan, entrepreneurs sound off about high interest rates almost as often as they do about bribes.

By global standards, Kazakhstan’s double-digit interest rates do look prohibitive. Last year, the target base rate – the benchmark interest rate set by the National Bank, on overnight loans between commercial banks – hit 17% in annual terms.

But most of this rate just compensates the lender for the average rise in prices throughout the economy – inflation. Last summer, the rate of inflation approached 18%. So in terms of purchasing power, the given base rate was roughly -1%.

To see what negative interest rates mean, suppose that you lent 10,000 tenge in 2016 for one year. This year, you would collect 11,700 tenge. Sounds great, but meanwhile the price of a samsa has risen from 100 tenge to 118. Rather than lending the 10,000 tenge last year, you could have bought 100 samsa. By lending instead, you delay buying the samsa to 2017; but at today’s prices, the interest repayment of 11,700 tenge purchases only 99 samsa or so. You wind up worse off than you would have been had you not lent.

Kazakhstan’s interest rates are not too high; they’re too low. They discourage lenders, not borrowers.  Creditors and debtors focus on the real interest rate – the market rate minus the (expected) rate of inflation. In our example, the real rate is about -1%: A given interest payment loses about 1% of its purchasing power per year.

Real interest rates are negative around the world. They aren’t always thus in Kazakhstan; but in recent years they were unconscionably high only in late 2015, when the gyrating tenge float created uncertainty that made borrowers cringe.  Ever since the National Bank began targeting the base rate, in September 2015, it has never exceeded 8% in real terms; and it was negative from April to October 2016, perhaps partly due to inflation engendered by a tenge devaluation and an expansion of money supply.  Since October the real base rate has been positive but has not surpassed 4.1% (see the figure below).

To determine whether real interest rates are high or low, compare them to the rate of economic growth – i.e., the rate of change in output (real gross domestic product). Since a loan can finance expansion of our capacity to produce, we would expect its real interest rate on average to approximate the overall rate of return to our stock of capital, which is the rate of growth in real GDP.  For the period from September 2015 to now, the average real base interest rate is 1.67%. This tracks well with the rate of real economic growth in 2015 (1.2%) and 2016 (1%) but not with 2017 (5.8% for January through May).  In fact, the average base rate this year has been 3.5%, which is strikingly low.

So if entrepreneurs in South Kazakhstan can’t find desirable lenders in their neighborhood, maybe the banking market there is not competitive.  They should beat the bushes in Almaty.  – Leon Taylor tayloralmaty@gmail.com

    

Notes

I derived all data on base rates and inflation rates (calculated from the Consumer Price Index) from the statistical publications of the National Bank of Kazakhstan (nationalbank.org).  Rates of economic growth are year-to-year changes in gross domestic product, adjusted for consumer inflation. They are from the National Bank for 2015 and 2016 and from the Committee on Statistics for 2017 (stat.gov.kz).

Reference

Institute of Business Ombudsman. Business development in the South Kazakhstan region is hampered by high banking interest rates and corruption in government agencies.  April 2017. http://ombudsmanbiz.kz/eng/press-centr/smi_ob_ombudsmene/?cid=0&rid=212

Fiscal verities

Does the 2008 financial crisis still plague governments?

You know the old saw – the two certainties of life are debt and taxes. What is less certain is that the latter will pay for the former. As a share of the economy, government debt is rising far more rapidly than tax revenues (Figure 2). In 2015, public debt around the world was almost 100% of gross domestic product -- up from about 60% in 2007, just before the financial crisis, according to World Bank data. The trend has a Western flavor: Debt ratios in the European Union and the United States closely track the global one (Figure 1). Meanwhile, around the world, the tax share of GDP was roughly 15%, as it has been for 20 years.

These patterns may seem to jibe with the notion of a debt overhang from the crash of 2008, propounded by a former chief economist of the International Monetary Fund, Kenneth Rogoff. In this view, debt trends persist because of feedback effects.  When assets rise in value, they serve as collateral for more debt. Credit expands. When they fall in value, credit contracts. A business cycle is born.

The details of this story vary with the region.  In Russia, the public debt share exceeded 140% of GDP in 1998 but has since swooned below 20% (Figure 3). It isn’t much higher in Kazakhstan. It has been rising in Ukraine since 2007 -- and steeply in Kyrgyzstan since 2014, when resource prices began falling. But their debt shares are still only about 70%.      

For the peculiarly national nature of borrowing, look at the share of all external debt in gross national income. In Russia, the share soared near 100% in the ruble crisis of 1997-8 but fell rapidly, according to World Bank data (Figure 4). On the other hand, China in recent decades has never had a problem, perhaps partly because the Opium Wars in the mid-1800s left it suspicious of foreign loans.

Even if we confine ourselves to a region, national disparities are evident. In Central Asia, the income share of external debt is much higher in Kyrgyzstan than in its neighbors, although debt ratios indeed have risen throughout the region in the last few years (Figure 5). In Kazakhstan, Kyrgyzstan and Russia, tax shares of GDP have fallen in the last few years and have rarely exceeded 18% since 1993 (Figure 6).  National history and institutions may play as large a role in debt and tax patterns as does international economics.

The growing prospect of government defaults, especially in the West, is a bit of a migraine. Relative to GDP, debt is rising faster than taxes. As the gap widens, creditors like Germany may press vulnerable governments like Greece for payment. This can lead to sudden spikes in tax rates that puncture fragile recoveries. Even if the government does fend off the wolves at the door, it is obliged to pay interest on foreign debts that drains its dollar reserves, weakening its currency and exposing it to speculative attacks.

Governments today are in a nasty fix. Interest rates, in terms of purchasing power, are negative around the world: Interest payments cannot keep up with price hikes. Since real interest rates are negative, creditors loan money when goods are cheap and are paid back when goods are expensive, so they are worse off than they would have been had they never lent. This applies to governments with surpluses – that is, those that collect more in taxes than they spend this year – because they are basically creditors trying to buy back their old debts. And governments with deficits – those that spend more than they collect – will be tempted by the low interest rates to borrow even more. The ratio of debt to taxes may keep rising.   

Which brings us to the third certainty of life: Debt woes don’t vanish, even when they no longer make the headlines. – Leon Taylor, tayloralmaty@gmail.com

References

Rogoff, Kenneth S. Debt supercycle, not secular stagnation. In Olivier J. Blanchard, Raghuram G. Rajan, Kenneth S. Rogoff, and Lawrence H. Summers, eds., Progress and confusion: The state of macroeconomic policy. International Monetary Fund (The MIT Press). 2016. 

World Bank. World Development Indicators. worldbank.org . The source of all data in this post.

Figure 1: The ratio of public debt to GDP.

Figure 2: The ratios of government debt and tax revenues to GDP.

Figure 3: Regional debt shares

Figure 4: Ratios of external debt to gross national income in Russia and China

Figure 5: Ratios of external debt to gross national income in Central Asia

Figure 6: Ratios of tax revenues to GDP