Grigoriy Marchenko, Governor of the National Bank of the Republic of Kazakhstan

The lesson of the financial crisis for an emerging market such as Kazakhstan is that taking risks with financial stability for the sake of rapid short-term growth would be an inexcusable lack of foresight.

For two-and-a-half years, since the beginning of the global financial crisis, Kazakhstan has gained invaluable experience in crisis management and the conduct of economic policy in emerging markets in the face of a very unfavourable external environment.

Kazakhstan is emerging from the crisis with minimal losses, but that is no reason for euphoria: the crisis highlighted errors of economic policy that should be carefully analysed and considered further. The most important lesson of the crisis was the conclusion that the sine qua non for sustainable development should be the provision of stability in the financial system.

In August 2007, Kazakhstan faced the negative impact of the global financial crisis stemming from the so-called contagion effect. The vulnerability of the economy and financial system of Kazakhstan in relation to external shocks was determined by a number of interrelated factors, both external and internal.

Financial liberalisation carried out in Kazakhstan a decade ago, combined with the positive expectations of participants in world capital markets in relation to developing markets, including Kazakhstan, allowed Kazakhstani banks to attract cheap funds from abroad in large quantities. Thus, by the end of 2007, the gross external debt of the country amounted to $96.9bn, out of which almost $46bn was the debt of the banking sector. Attracting investors from the world markets, banks in Kazakhstan used securitisation for rapid credit expansion in the most profitable and at the same time the most risky credit market segments such as consumer lending and real estate-related credit (both through construction sector loans and through mortgages).

As a result, Kazakhstan's economy started showing signs of overheating, the most significant of which was an inflating bubble in real estate. It should be noted that bubbles in asset markets became widespread globally by 2007, and any open economy with a sufficiently high credit rating experienced overheating to some degree. The peculiarity of bubbles is that they cannot exist without the constant influx of money: if investments in overheated segments of the economy stop, they experience the inevitable collapse. This happened in Kazakhstan with the real estate market in 2007, when banks began to make the first large-scale principal repayments of their external liabilities, and the situation on the world financial markets did not allow effective refinancing of their foreign liabilities.

In August 2007, banks in Kazakhstan faced a shortage of liquidity, which did not allow them to continue lending at the same level as previous years. To overcome the shortage of liquidity in the banking sector starting in August 2007, the National Bank of the Republic of Kazakhstan provided the second-tier banks with short-term liquidity through the holding of reverse repo transactions and swaps. The National Bank continued to "feed" second-tier banks in this way for almost two years.

A test of strength

The first negative impact of changes in bank credit activity affected the building industry and, subsequently, through macroeconomic relationships, a domino effect occurred. To reduce the negative effect of the crisis on the most important and simultaneously the most vulnerable segments of the economy, the government implemented an unprecedented infusion of cash into the economy, most of which was made through banks.

Thus, the joint action plan of Kazakhstan's government, the National Bank and the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Markets and Financial Organisations to stabilise the country's economy and the financial sector for 2009-10, adopted on November 25, 2008, envisaged an allocation of Tg1200bn ($8bn). Of this, Tg480bn was aimed at stabilising the financial sector; Tg360bn on the development of the housing sector; Tg120bn was designed to support small and medium-sized enterprises; another Tg120bn for agribusiness; and a further Tg120bn for implementation of infrastructure and breakthrough projects. It should be noted that the decision taken several years earlier to establish a contingency purse for a 'rainy day' - the National Fund - now looked highly astute.

Lower prices for oil and Kazakhstan's other main exports in world markets led to a decrease in the supply of foreign currency in the domestic market, as well as causing high speculative pressures on the market. In these circumstances, from October 2008 to January 2009 the National Bank had to maintain exchange rate stability at the expense of intervention in the foreign exchange market, which totalled $6bn. In addition, the majority of Commonwealth of Independent States countries had, by the end of 2009, carried out devaluation of their national currencies, which made their exports much more competitive compared with Kazakhstan.

The need to preserve the competitiveness of Kazakhstani goods and maintain foreign exchange reserves led to a decision on the devaluation of the tenge, which took place on February 4, 2009, and the introduction of a new currency corridor of Tg150 to the US dollar, plus or minus Tg5. Speculation spikes in the currency market were observed during most of 2009, a trend that was not reversed until November, leading to a relative excess of foreign exchange supply over demand.

The crisis was exacerbated by problems at two important banks: Alliance Bank and BTA Bank. The former management of these banks allowed gross violations and, in some cases, illegal activities that left these banks in a critical state. In early February 2009, the state was forced to buy a controlling stake in BTA Bank and change the management at Alliance Bank. The banks themselves are completing the current process of restructuring their external debt.

Thus, significant efforts of the state and, in particular, government officials in key departments have allowed us to take a critical moment in the life of the country and sustain a kind of endurance test.

Lessons of the crisis

Currently, we face an even more complex task, which is to use the lessons of the crisis in the future. The main conclusions that we drew from the crisis are the following. First, we should not rely on a favourable external environment, but should build the economy and financial system so as to have a safety margin in the event of an adverse economic climate in the world. In other words, we must diversify our economy and develop the manufacturing industry.

Secondly, we need to be careful with the use of external borrowing and avoid distortions in the lending policies of banks, as was the case with the financing of the real-estate market. Attention should be paid, first and foremost, to funding the real sector of the economy. Thirdly, it is necessary to improve mechanisms regulating the financial system in order to reduce systemic risks and pay special attention to the development of a crisis early-warning system.

Kazakhstan has successfully coped with the negative impact of the global financial crisis on its economy and the financial system of the country and is now entering a new post-crisis phase of its development.

Entry into this phase allows the country to make a qualitative leap in all indicators of socio-economic development, including the financial system and the quality of its services.

In order to make the fullest use of the possibilities of the financial system in this situation, the concept of developing Kazakhstan's financial sector in the post-crisis period was adopted. Major goals of the concept are:

- enhancing the sustainability of the financial sector;

- creating conditions to prevent deficiencies, sources of instability and events detected during the current financial and economic crisis;

- promoting investment activity in the post-crisis period as a tool for the implementation of macroeconomic decisions;

- and building confidence in the financial sector of the country, among both investors and consumers of financial services.

Domestic sources of funding

The development concept pays particular attention to such issues as financing the real sector of the economy and the full utilisation of domestic sources of funding for both the financial system and the real sector; preventing bubbles in asset markets; and reducing the aggregate level of risks of the financial system to avoid them threatening its stability.

In particular, mechanisms for regulating the financial sector will be introduced that are fundamentally new for Kazakhstan. These include tools designed to achieve countercyclical macroprudential regulation. The new approach will be to minimise risks posed at the level of the financial system as a whole, and minimise the negative impact of external factors on the economy and financial system of the country.

Grigoriy Marchenko is governor of the National Bank of the Republic of Kazakhstan, and the former CEO of Halyk Bank


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