Sub-prime threatens feel-good factor in Kazakhstan

KAZAKHSTAN’S phenomenal economic growth and appetite to play on the global financial stage have been soured by sub-prime, writes Jonathan Rest.

That was the message from Stefan Scholz, managing director of Visor Capital, an investment bank that conducts mergers and acquisitions business across Kazakhstan and other Commonwealth of Independent States countries.

Speaking at a risk-management conference in Almaty, the Kazakh capital, Scholz said: "The big Kazakh banks have made a lot of money on the international markets by borrowing at very favourable rates and then issuing out money to domestic companies at higher rates. Essentially, they have survived on the assumption that international money came in low and went out high. The problem was they overstretched it. They have loans to repay but the belts of investors have tightened."

Kazakhstan's capital, Almaty: the country has enjoyed growth in recent year
but that could be ending

Scholz said that domestic growth will feel the full effects of the international crisis. He explained: "Gross domestic product [GDP] per capita in Kazakhstan is consistently growing, 9% last year. That rate is phenomenal. Most European countries would be happy with a rate of around 2% to 3%. Wages are rising at a far faster rate than inflation, so disposable income is growing, making it more interesting for businessmen to diversify away from the staple oil, gas and mining industries into the retail sector.

"This all looks perfect but, based on the liquidity crunch that the banks are experiencing, the international markets are now very closed to loans and the domestic market is not much better. Average rates for corporate loans in Kazakhstan were just 12% last year but now they are between 16% and 20%, making the current market too expensive. This means corporates will have to scale down their investments and the high GDP growth that Kazakhstan has enjoyed over recent years will likewise slow."

But it is not all doom and gloom for the Kazakh financial services industry and the importance of risk management cannot be ignored. Scholz continued: "Banks in a position to get money to finance business and fund growth have seen an increase in their profits. Their conservative business models, based on good risk management, mean they can pass the high rates they have to pay themselves on to their clients.

"Since some banks cannot finance additional business, those that can take the advantage. I foresee much cannibalisation over the coming months, where one bank wants to win business from another. But it is not the case that all the banks are in trouble - a lot depends on risk management within banks. The gap between the excellent banks, the good banks and the bad banks has never been so wide."

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