The Effects of Fluctuations in the World Oil Market on Bank Lending in the Economy of Kazakhstan

sector has expanded significantly in the economy of Kazakhstan. The highest development in the banking sector took place in the period between 2000 and 2008 (until 2008 world economic crisis). At that period, growing oil prices and cheap funding in external financial markets had positive effects on the country’s banking sector. Along with the favorable external factors, the absence of strict regulation in the banking sector allowed it to grow at a rapid pace. However, the world economic crisis took the overheated Kazakhstani banking sector by surprise and caused serious destabilizing effects in the sector in 2009. The government of the country rescued the banking sector by nationalizing some commercial banks, namely, BTA Bank, Kazkommertsbank, Halyk Bank, getting a significant financial support amounted to 332 billion tenge ($2.2 billion) from the National Fund of Kazakhstan. This measure helped to avoid the collapse of the banking sector, but the sector was still in a bad situation and even in 8 years after the global economic crisis, the sector was not able to return back to pre-crisis conditions. One of the main indicators of crisis in the banking sector is the amount of loans in the system. The banking sector’s loans were seriously affected by the crisis of 2009 in Kazakhstan, which created a vast amount of non-performing loans (NPLs) that exceeded 30% of total banking sector’s loans. However, despite the high level of NPLs, the banking sector managed to grow and to continue crediting economy at relatively small pace in the period between 2009 and the middle of 2014. In the middle of 2014, the banking sector faced additional challenges. For instance, in two and a half years, from July of 2014 to November 2016 the loans of the banking sector increased by only 5.41% in nominal terms and reached 12.84 trillion tenge ($38.91 billion), while inflation was more than 26% in this period. The sharp decline in world oil prices along with investment outflow from emerging countries and low metal prices have played a significant role in worsening the conditions in the banking sector in the country. The low oil prices had a negative effect on the national currency causing a negative impact on the bank lending in Kazakhstan. For instance, in its attempts to avoid rapid economic deterioration and social turbulences, the National Bank of Kazakhstan (NBK) delayed the national currency devaluation. Until August 2015, the NBK maintained the fixed exchange rate by decreasing liquidity in terms of national currency, which in turn caused interest rates to increase in financial markets. Moreover, high devaluation expectations among the population, which resulted in dollarization in deposits caused further weakening of tenge liquidity in the banking sector. As a result, the banks’ inability to issue loans in terms of foreign currency together with low funding in tenge caused negative growth in the bank lending. Therefore, from July 2014 until the devaluation in August 2015 the loans in the banking sector decreased by almost 13% to 10.64 trillion tenge ($32.24 billion) from 12.19 trillion tenge ($36.93 billion). During this pre-devaluation period, the decrease in loans in terms of national currency was 0.22%, while the decrease in loans in terms of foreign currency was 38.10%.

Devaluating tenge in August 2015 slightly improved the situation with tenge liquidity in the financial markets. From the beginning of August 2015 to November 2016, or the post-devaluation period, the bank loans grew by 20%, which is a considerable growth. However, if we look at the loans in term of currencies, it can be observed that the bank loans in terms of tenge grew only by 4.5%, while loans in terms of foreign currency grew by 74.2%. The huge growth of the bank loans in terms of foreign currency was not because of the growth of actual issuance of loans but the devaluation of tenge.

It is worth mentioning that not all sectors of the Kazakhstani economy suffered from the decrease in bank lending during the low oil prices period. For instance, the loans to the agricultural sector, communication sector, transport sector, industry and trade sectors grew by 68.4%, 56.9%, 43.3%, 34.8% and 24.7%, respectively, during the period. These high growth rates demonstrate the high level of governmental support, especially for the agricultural sector. In addition, due to the government’s countercyclical policy aimed at developing the small and medium enterprises (SME’s), the loans to the SME’s grew by 90.57% and reached 2.96 trillion tenge ($8.96 billion) in the reported period.

Meanwhile, the loans to the construction industry, to individuals and other sectors in the economy decreased by 23.7%, 2.9%, and 15.7%, respectively. These three industries account for 55.1% of total bank loans or 7.01 trillion tenge ($21.24 billion) in November 2016, while they accounted for 65.01% or 7.88 trillion tenge ($22.67 billion) in July 2014. The loans to the construction sector decreased mainly due to the fact that it requires long-term loans to finance its activities making it too risky for the banks to provide lending during the period of the poor economic situation in the country. Moreover, the loans to individuals decreased because of the deterioration in the income level of the population, increased unemployment, and increased prices of imported goods.

Despite the fact that the loans to individuals decreased, the interest rates did not experience significant changes. For instance, the interest rates on loans to individuals in terms of tenge were 19.2% in July 2014 and the same rate was in November 2016, while the highest interest rate was observed in March 2015 (21.4%). The interest rates on loans to individuals in terms of foreign currency increased by 0.9% to 11.4% during the same period, and reached 14.6%, which is its highest rate in October 2016. On the contrary, the interest rates on loans to non-banking legal entities in terms of tenge increased significantly from 10.5% to 15.8% during the same period. Moreover, the interest rates reached 25.8% in February 2016. On the other hand, the interest rates on loans to nonbanking legal entities in terms of foreign currency decreased by 0.9% from 8.8% in July 2014 to 7.7% in November 2016. The high increase in interest rates on loans in terms of tenge can be explained by the liquidity shortage in financial markets, which made funding sources too expensive for the Kazakhstani banks.

In conclusion, it is important to note that low oil prices had a significant effect on bank loans in the economy of Kazakhstan. Due to the decision of the NBK to focus on implementation of the inflation targeting, which could lead better economic results in the long-term comparing with short-term effects of monetary expansion, there was no opportunity to increase liquidity in financial markets that could improve the situation with weak bank lending. Therefore, it could be expected that in near future the bank lending in the economy of Kazakhstan will not increase rapidly, mainly because of the fact that the NBK would prefer the long-term stability rather than the short-term economic growth.

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Prepared by Lidiya Parkhomchik, Hayal Ayca Simsek, Zhulduz Baizakova.