Kazakhstan is one of the most successful transition countries that achieved to move to free market economy from centralized economy. Kazakhstan entered into the period of economic revival after the widespread reforms in mid-1990s. Despite 1998 Asian crisis, the government implemented specific measures including trade protection and foreign exchange rationing. The macroeconomic indicators of Kazakhstan were relatively positive until the economy was hit by the negative effects of the Global Financial Crisis in 2008. Kazakhstan banking sector was also negatively affected by the Global Financial Crisis.
On the other hand, regarding the latest data, Kazakhstan’s real GDP growth reduced from 6% in 2013 to 4.3% in 2014, due to weaker domestic demand. This especially resulted from the devaluation of the local currency in February 2014 and reduction in oil prices in 2014, together with weak external demand for Kazakhstan’s crude oil, iron ore, and metal products. In forecasts of international institutions such as European Bank for Reconstruction and Development, International Monetary Fund and World Bank, real GDP growth rate for 2015 was predicted as 5.1% in September 2014 but due to the sharp fall in oil prices that hit the export revenues of the country, the new forecast expects Kazakhstan’s GDP growth at 1.5%. Private consumption also was negatively affected by both devaluation and strict lending conditions for consumer loans. Inflation rates increased from 4.5% in January 2014 to 7.4% in the first months of 2015 due to devaluation and higher imported input prices.
To recover from these negative impacts on the economy, the Government launched an economic support program for 2014–15 of 1 trillion tenge (5.5 billion dollars), aimed mainly to solve credit problems in the banking sector by reducing the level of non-performing loans (NPLs) and providing subsidized loans to small and medium sized enterprises (SMEs) in 2014. With this program, 500 billion tenge (2.75 billion dollars) will be allocated to support SME’s, rehabilitate the banking sector and construct infrastructure for free economic zones. Another support for SME’s is allocation of 100 billion tenge (550 million dollar) from the National Fund of Kazakhstan annually between 2015-2016 through interbank lending of the Damu Entrepreneurship Development Fund and the Development Bank of Kazakhstan.
Complex regulatory measures will be implemented to maintain financial stability. These measures aim to increase the role of national currency in economy, stimulate the growth of tenge liquidity of banks to further increase lending for the economy and recover the banking sector. In the program, it is planned to increase guaranteed payout to depositors of Kazakhstan Deposit Insurance Fund on deposits in tenge from the current amount of 5 million tenge to 10 million tenge (27,000 dollar to 55,000 dollar) in order to enhance the role of the national currency. The government plans to achieve this aim by increasing the fund’s capitalisation and reducing the annual interest rate on guaranteed deposits in dollars from 4% to 3%.
In 2014, Kazakhstan’s banking sector benefited from the economic support program. Problem Loans Fund was recapitalized by 1.4 billion dollar in 2014 and in the first months of 2015 in order to reduce NPLs which constituted about 23.5% of total bank loans in December 2014. In February 2015 a number of NPL measures which have to be fulfilled by banks until 2016 was announced by the National Bank of Kazakhstan (NBK). In this sense, banks will be required to reduce NPL ratios to 10% by the end of 2015. Banking licenses which are not able to comply with these requirements will be potentially withdrawn until 2016.
Tax exemptions for NPL write-offs were also extended. However, the NPL ceiling (set at 10% by end-2015) is still ambitious for several banks. Besides, strict monetary policy affected the rate of credit growth negatively. Credit growth reduced from double digits in the first half of 2014 to 2.3% in the first months of 2015. Nevertheless, subsidized loans to SMEs grew from 9% January 2014 to nearly 33% in February 2015, supporting credit growth. Besides, Basel III Standards which set softer requirements for banks in terms of capital adequacy of banks in the first stage of transition will be reduced. This process will be monitored by the NBK
We can conclude that the economic support program and other implementations in the financial sector aim to strengthen the economic stability in Kazakhstan. Non-bank financial institutions (NBFIs) can help commercial banks by targeting specific market segments in which banks do not participate actively. However, in Kazakhstan’s financial sector, NBFIs are significantly underdeveloped compared to the similar countries. In this sense, if a more conductive legal and institutional framework can be established, financial tools which help easy access to finance (leasing, factoring, trade-credit financing) could be promoted. The new legislation in the banking sector is expected to increase credits, to encourage foreign and domestic investments, to improve financial stability and to enhance economic growth in Kazakhstan.
Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.