Kazakhstan’s financial markets were hit hard by the US subprime crisis. That’s not surprising when one looks at the national banks’ exposure to international credit markets.

Just consider the macroeconomic data: Kazakhstan’s debt service ratio - i.e. debt service as a percentage of the country’s exports - stands at 42%, second only to Brazil’s, and most of that comes from the private financial sector.

A newly founded 4-billion-dollar stabilisation fund, on which we reported earlier, has aroused a lot of scepticism. Essentially, the mere act of setting up a fund like that could further unsettle the markets. Central Bank chairman Saidenov says:

“It is clearly a bubble and it has to burst but we are trying to control the way the burst happens.”

This bursting bubble will have effects on the real economy. Construction companies are particularly hit by the sudden toughening in getting loans out of the troubled banks:

…companies in the sector are reducing investment after lending from over-leveraged Kazakh banks dried up. Property prices, which have risen by 900 per cent in big cities in the last four years, have begun to fall in some areas.

Kazakh banks have to pay $4 billion in loan services this year, $12 billion next year. The Central Bank will provide assistance, and the state-owned mortgage company will take over guarantees from struggling banks - essentially the same policy package that the US/UK/EU has applied in the aftermath of the subprime crisis.

However, there is one striking difference: The Kazakh financial sector’s supervision is not as robust as it is in Western markets (where it is, admittedly, far from perfect, too). Especially in large-scale construction projects, there often seems to be a good deal of opacity and shadiness involved.

So, while one can certainly hope that the Central Bank and the state-owned mortgage company won’t bail out any of those candidates that deserve to fail and exit the market, there remains some suspicion over the use of precious resources to preserve the status quo.

Definitely good news is that foreign banks are buying themselves into the Kazakh market. Most of ATF’s shares are being bought by Italian bank Unicredit, and Israeli Hapoalim takes over Demir.

And, finally, back to the bursting bubble: It might in the end not a bad thing if the real estate prices stop soaring by rates far detached from any common sense fundamentals. Maybe it then becomes lucrative to invest in something more productive than ever more pompous construction projects.