A decade of tight banking supervision and oil-fuelled growth has yielded one of the fastest-growing financial sectors in the world. Some banks doubled their assets last year while on average the sector is doubling every two years.
Discussion of Kazakhstan’s banking and financial sector usual entails the phrase “except for the Baltic countries,” the only ones in the former Soviet Union to have done better.
But, as First Deputy Prime Minister Grigori Marchenko recently pointed out in an interview: “They had help from the European Union [which they join May 1] and their banks are mostly foreign-owned. We did it all on our own.”
On most levels, Kazakhstan’s financial sector is now comparable to those of central and eastern Europe. Even credit card use is increasing at a faster clip than in Russia.
Mr Marchenko on January 1 ended a four-year stint as governor of the central bank, the National Bank of Kazakhstan, where he presided over the near-doubling of GDP and the strengthening of reforms initiated by his predecessors – reforms that Russia, which ruled the country for nearly two centuries, is only now beginning, and that Kazakhstan’s central Asian neighbours are not even contemplating.
One of the marks of Mr Marchenko’s tenure has been to gather supervisory functions from various other institutions and ministries and strengthen them.
From the start, the national bank supervised the banking sector, which entailed reducing the number of banks from 230 to 42 today.
Close supervision
But insurance supervision was taken in 1998 from the ministry of finance, securities market supervision was taken in 2001 when the national securities commission merged with the national bank, and in 2002 the committee on pension funds supervision was moved from the ministry of labour to the National Bank.
All these functions, including banking supervision, were consolidated in 2002 into the bank’s department of financial supervision, headed by Anvar Saidenov, a deputy governor, with the plan that it would eventually be spun off into a separate agency, which took place on January 1.
Mr Saidenov had been expected to head the new agency, known informally as the agency for financial supervision, but President Nursultan Nazarbayev asked him to succeed Mr Marchenko as central bank governor.
Bolat Zhamishev, another deputy governor, was named to the agency, which is formally called the Agency on Regulation and Supervision of Financial Markets and Financial Organisations.
The two men joined a central bank team assembled by then-governor Daulet Sembayev in 1993, when Kazakhstan introduced its currency, the tenge, in the face of 1600% inflation.
Western-style
The team has remained unique in the Kazakh government for its cohesiveness and its commitment to transparency and Western-style efficiency – and its contrast with a government widely condemned for its corruption and sluggishness.
In style and appearance, the two men could not be more different. Mr Zhamishev, 46, is shaven-headed, athletic, formal and does not speak English. He has a PhD from an economics institute in Kazakhstan. Before coming to the central bank, he headed the national pension fund agency, wasvice-minister of labour and, later, of finance.
Mr Saidenov, 43, is relaxed, jovial and speaks excellent English. Educated in Moscow and London, he spent three years with the European Bank for Reconstruction and Development in London. He served a previous stint as a deputy governor and was also chairman of the country’s largest savings bank and vice-minister of finance before returning to the central bank two years ago.
In separate interviews, the two men spoke of their goals and the problems they expected to face.
Attack on the currency
Mr Saidenov admitted that with prices of oil and minerals high, money was gushing into the country at such a rate that it was threatening to overvalue the tenge, weakening prospects for the development of the non-oil sector in the face of cheaper imports.
“It’s one of the major challenges of the central bank,” he says. However, he says that an appreciation of a few percent would not have any effect on the economy.
Inflation last year was 6%, and Mr Saidenov says the bank’s teams were working on devising core inflation targeting methodology that would prevent it from rising further.
“That’s probably our biggest priority,” he says. “But even in countries such as Canada, the results of core targeting are mixed. And for Kazakhstan, which is a transition economy, it’s more complicated.”
On currency control, he says the bank was moving toward currency liberalisation, with the goal of full convertibility by 2007.
One of the achievements of the country’s reformers is the national oil fund. Modelled on Norway and started in 2001, it now holds $3.7bn and will probably reach $4bn this year.
It was founded on the principle that all revenues accrued from oil sales at $19 a barrel would go into the budget and all revenues above that benchmark would go into the fund. When the oil prices fall below that mark, the flow is reversed and the fund money goes back into the budget, creating stability.
The benchmark was set for five years and discussions have begun as to where to set the benchmark for the five years starting in 2006, Saidenov says.
One of his predecessors as central bank governor, Oraz Jandosov, adds: “The benchmark price should be increased, although it’s not clear to everybody in the government yet.”
The question that preoccupies thoughtful Kazakhs and donors alike is whether the leadership will be able to reform the sectors that will most benefit the population – health and education.
“The government has the intention of improving these sectors and the funds,” Mr Saidenov says. “But the point now is to use the funds in the right manner, because nobody can deny there is corruption, misuse of funds and questionable policies.”
In a separate interview in his office, still in the National Bank building, Mr Zhamishev said the agency was created with the help of a financial sector assessment mission carried out jointly by the International Monetary Fund and the World Bank in February. The mission suggested Kazakhstan move forward with consolidated supervision and risk management issues.
“These are the main mid-term priorities of our agency,” he says. “The concept of the financial sector development ensures that supervision techniques should comply with the European Union standards by 2007.”
Decline in quality
Discounting fears that the rapid growth of the banking sector may lead to a death of sound management talent, he notes that the starting point was quite low (in 2002, bank assets formed only 20% of GDP). However, he admits that such a rapid asset growth has affected the quality of loan portfolios and assets over the last year, with the proportion of substandard loans rising from 29% to 39% last year.
“This is still tolerable,” he says. “Currently, there are no reasons for us to worry.”
As banks move into riskier consumer loans, “risk management and consolidated supervision are the two areas there is still much to be done about,” Mr Zhamishev says.
Trouble at the Black gold mine
Kazakhstan aspires to climb to the big leagues of the oil producers by the end of the next decade. At that point, Kazakhstan expects to export some three million barrels a day, more than Russia does today.
But this timetable is looking increasingly optimistic as the Kazakhstan government’s relations with the foreign oil companies it needs to get its crude out of the ground seem to get worse and worse. As a result of disputes, two major projects have been delayed, the biggest by two years.
As Kazakhstan represents a small, isolated market unattractive to non-mineral foreign investors, much of its future rests on its management of its subsoil resources, which have led its export-driven boom.
“The question is not whether the oil will be lifted,” says Laurent Ruseckas, chief Caspian analyst with the Eurasia Group. “It’s whether it will be lifted later rather than sooner.”
Last year, the government, which owns a 20% share in the country’s biggest moneyspinner, the Tengiz field on the arid shore of the North Caspian Sea, refused to pay for its share in a $3.5bn expansion plan designed by Chevron and ExxonMobil, which together own 75% of the field.
Rather than dip into its oil-fuelled offshore National Fund, created to cushion against seesawing crude prices, the government insisted the US majors borrow its $800m share and lend it – interest free, sources say.
The Americans balked and eventually sent their contractors home, to the visible shock of the then finance minister, known for his hostility toforeign investors.
Nearly three months later, agreement was reached: the majors would indeed borrow the money, at lower rates than Kazakhstan would have got, but the government would pay the interest, the sources say. Partly because of the disruption, the bill for the expansion is now expected to top $4bn.
A similar scenario unfolded more recently over the country’s biggest oilfield, Kashagan, which is almost twice the size of Tengiz. It is rated fifth or sixth in the world, and is also the planet’s largest untapped deposit.
