Run run run!
Kazakhstan’s economic boom has now firmly caught the attention of international investors. As reported in this place earlier, some Kazakh blue chips are listed on the London Stock Exchange (albeit the bulk of the stocks is in the hands of a select few strategic investors and/or owners of the companies). The Kazakh Stock Exchange is seeing its trading grow at a fast pace, with both domestic and international investors unprecedently active.
KASE’s market capitalisation, the cumulative value of traded shares, has been growing, too - although it remains at low levels compared to Western stock exchanges. Trading in shares has also grown fast - a look at the period between 8-16 February this year shows that stocks worth $51 million changed their owners - which seems like a less active week taking into account that in 2006, $7 billion got turned over on the securities market (stocks and corporate bonds). As a comparison, average daily turnover in UK equities at the LSE in 2006 was GBP12 billion.
The emergence of international investors, however, could signify a run on to the Kazakh market: Deutsche Bank has just launched a new investment product composed of five stocks listed on the Kazakh stock exchange (three banks and two energy corporations). ABN AMRO didn’t wait too long and followed suit, as will other fund managers. Thanks to so-called cross-listings, i.e. Kazakh companies listed both at KASE and international stock markets, pricing becomes more transparent and risk becomes more manageable, therefore boosting trade on the KASE.
The trade in stocks and corporate bonds is, however, not even the biggest part of market activity on the Kazakh Stock Exchange. The by far biggest growth rates accrued in trade with public repurchase agreements, or repos. Non-existent before 2000, trading in these instruments today dominates the KASE. The repo market accounts for 67.3% of the overall KASE turnover (KZT2 trillion). Repos are a popular tool for the big Kazakh pension funds and increasingly for banks to access short-term capital for their lending.
Unsurprisingly, these trends are spurred by continuously rapid growth rates in the real economy. Nevertheless, there are several pitfalls that in combination with imbalances in the real economy could prove problematic:
The increasing links of the KASE with other stock markets and the growing penetration by international investor means that Kazakhstan is becoming susceptible to the “emerging market flu”. In financial terms, this would be called an “emerging market correction”, one of which occured in May/June 2006, making the KASE decline by almost 30%. Repos are a sophisticated financial instrument - but not the most stable. There could be systemic crashes if one party fails to have a bond/stock at the end of the agreed on period.
The Kazakh banking sector is creating reason for concern: Foreign lending (mostly short-term) is up, something that has caused trouble ahead of the Asian Financial Crisis in 1997. However, as Kazakhstan’s primary export commodity is oil and Dutch Disease effects seem to be reality, there is at least no downward pressure on the exchange rate, reducing currency risk for the banks. Nevertheless, this exposure by the banking sector makes it obvious that the current financial system in Kazakhstan is very much dependent on favourable external conditions, i.e. high oil prices (and an appreciating tenge).
What is more, the current boom in bank lending seems at least partly to be due to a real estate boom, which is in itself problematic for financial stability. The system is highly speculative and can lead to a perilous bubble: When asset prices appreciate, so does the value of the collateral for new loans, which in turn leads to growing lending etc.
Corporate governance continues to be a problem in the financial sector, too, although arguably reform has gone farthest here. Concerns had been voiced ahead of the IPOs of several Kazakh blue chips. Shockwaves don’t take a lot of bad news, and if investors’ confidence evaporates, this could have implications for financial stability. Arguing from a more micro perspective, Kuda, a commentator on The Registan, offered this interesting anecdote casting light on the extent of the real estate bubble:
A few months ago I was chatting with a couple of Kazakh friends about the housing, insane prices, having to move out of centre due to rent etc. Talking about getting a ‘mortgage’ one remarked that if you ask around, just a little, you can find bank clerks (presumably somewhat higher than front desk staff) who will happily give you whatever loan you want to buy a flat if you slip them $1000. The idea being that you can then sell on the proprty. Checks seem limited and slow. The workers at the bank apparently take the attitude that nothing will come back to them as they will probably have left.
While current imbalances might be covered by solid and robust macroeconomic data, observers are voicing growing concerns, reports RFE/RL:
“The system is under stress,” Kimming said. “Credit proceeds versus the assets booked are not the same quality of assets typical in any country where you have this type of credit growth. On top of that, credit growth is typically accompanied by significant real-estate appreciation. And the real estate is typically the security for credit growth. Obviously, the banks have to be very cautious.”
Even President Nursultan Nazarbaev has warned that Kazakh banks are dangerously exposed in the area of corporate loans. And many analysts have warned that the Kazakh economy risks overheating at its current pace.
Comments on this topic are very welcome as I am just working on an essay on Kazakhstan financial sector development.
on March 13th, 2007 at 4:42 pm
This article is does not accurately reflect the whole situation in Kazakhstan. My first criticism is that the author was eager to mention the significance of Oil&Gas section in KAZ’s GDP, but left out the fact that Kazakhstan is now really expanding its other sectors of economy, primarily NON-energy sectors, such as manufacturing, IT, spare parts, heavy machinery etc.
Second, cited from the article: “A few months ago I was chatting with a couple of Kazakh friends…” is not a serious remark, as this does not provide an in-depth analysis as to who is the source of this information, and how accurate this is.
The author should take some extra classes on how to write proper articles in a professional manner, and try to avoid a biased attitude.
One of the latest news is that Kazakhstan is reallocating its casino industry into one single city near Almaty that is likely to attract $10 billion foreign investments more, most probably from China. Besides, Kaz is planning to construct the highest tower in the world, with the height of 1991 feet.
on March 13th, 2007 at 7:43 pm
Thanks for your feedback Mergen.
A couple of points in response:
1) Non-oil growth, although not mentioned in the above article (which is about the growth of the financial sector) is a disputed topic. While it is certainly true that the Kazakh economy is growing in non-oil segments, the question is how much is it doing so and how do you frame it: Construction’s share in GDP growth is high, as is the financial sector’s. It’s a relatively straightforward exercise to link these two facts to the growth of the oil sector. The IMF (2006) calculated that non-oil growth is comparing favourably with Russia and Azerbaijan, but remains below the oil sector’s growth. You certainly have a point, i.e. Kazakhstan is growing robustly in other sectors, too. However, I am not making any point to the contrary above if you have cared to read it properly.
Second of all, the anecdote you criticise is what it is, an anecdote (also introduced as such by me in the text). While it might certainly be non-representative for the whole system, you won’t disagree that corporate governance in the financial sector is an issue in Kazakhstan (as it is in most other transition countries). The fact that insiders are selling stakes in banks (Morgan Stanley 11/01/07) is also another in indication of that.
And, as far as your third point is concerned: Your general criticism towards my post isn’t well warranted when looking at the quality of your first two remarks. While I am taking classes on this topic at the moment (neweurasia is, as a reminder, not a fully professional news outlet, but rather a group of students), your cited evidence for the contrary does not really convince me of your arguments’ insight. A skyscraper and a Casino Royal are hardly the type of investment that is going to propell Kazakhstan towards its aim of economic diversification towards other productive sectors.
on March 13th, 2007 at 8:27 pm
Dear author/editor,
Could you please re-send your reply to my previous comment? I received your e-mail, but accidentally deleted it. Thanks. Mergen
on March 13th, 2007 at 8:41 pm
Thank you for your reply to my comments. You keep emphasizing the petroleum input in our GDP, but again, as you previously mentioned, your main focus should have remained on the financial sector. I am still convinced that your article is very much biased. New industries are now booming in Kazakhstan, such as IT, agriculture, construction, new plants’ manufacturing, machinary - just to name a few. So, if your main point is the financial sector, please try to stay focused on this topic, without trying to deviate from it to Oil and Gas. Yes, Kazakhstan is still dependent on the latter, but our GDP growth has been about 9% per year for the last 5-6 years, which one of the highest in the world, and probably the 2nd highest in Asia, after China. Of course, you may keep degrading “the quality” of my comments for this article, but you cannot compare yourself (assumably with good professional writing experience) with me, who has NO experience in journalism. And, furthemore, such attitude minimizes my desire to write any more comments on this matter.
on March 14th, 2007 at 7:35 pm
Mergen - if my tone got misunderstood, I am sorry. No attitude intended!
Couple of points - you’re right, Kazakhstan is booming and it is great to see the country being successful, having implemented the right policies at the right time, clearly reflected in the financial sector’s sophistication and diversity.
I think, however, that cautionary tones and constructive criticism are needed right now for the country to continue its path and NOT land nose-down.
I’m sure that such clever people like Grigory Marchenko (among many others) have a clear grasp of the issues at stake, so there is enough reason to believe that Kazakhstan can continue its growth path without the shock-like crises that have ground other emerging markets to a sudden and painful halt.
Stay tuned for more coverage about this on this blog - and we of course always appreciate comments and inputs!