Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Asia-PacificDecember 1 2016

Tough talk from Kazakhstan’s central bank governor

Kazakhstan’s central bank governor outlines his strategy to Nick Kochan, which include a free-floating tenge, tackling high dollarisation levels and non-performing loans.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Daniyar Akishev Talgatovitch

Taking over the top job at the National Bank of Kazakhstan (NBK) in November 2015, Daniyar Akishev Talgatovitch had to deal with the residue of an interventionist monetary policy based on devaluations, which had left nothing but resentment and mistrust.

The answer for the career central banker (promoted from deputy governor) was to reduce intervention in the management of the Kazakh tenge exchange rate, and thereby enhance transparency.

“I instructed the central bank to stop intervention,” says Mr Akishev. The currency depreciated quickly by 30%, but then found equilibrium. “We introduced a base rate, increased the price for the domestic assets in tenge and created some market incentives for saving in the national currency.”
 
The decision to end the central bank’s involvement in managing the exchange rate followed extensive research conducted by Mr Akishev into currency management systems in Colombia and Argentina. The 40-year-old economist had formerly worked in the NBK’s research department.

“As we no longer intervene in the market, the exchange rate is volatile and each day the currency can appreciate or depreciate,” he says. Furthermore, the central bank has not placed any limits on currency movements, such as a range within which the currency is allowed to move.

Tenge appeal

Transparency and easily understood market mechanisms are Mr Akishev’s priorities. “People can see what is happening. They understand the reasons for that day’s tenge exchange rate, such as oil price changes or movements in other exchange rates, particularly the currencies of China and Russia, Kazakhstan’s primary trading partners,” he says.

Mr Akishev is also enhancing efforts to clarify the policy for the management of the country’s balance of payments and the competitiveness ratio of domestic producers. Pulling out of currency rate intervention will produce greater stability, he insists, saying: “The tenge’s movement is a reflection of daily market conditions. The free-floating exchange regime provides us with some freedom, so we can avoid negative shocks.”

Greater trust in the market will tackle current high dollarisation levels in Kazakhstan, according to Mr Akishev. He argues that the NBK needs to do more in explaining its policy and communicating more effectively. “We are trying to encourage people to move their savings into the tenge by explaining that saving in the national currency is presently more profitable, safer and guaranteed,” he says.

Those who have become accustomed to using a fixed exchange rate to manage personal and corporate budgets need time to absorb the changes. “The tenge dollar rate has been used as an indicator for the quality of life. People used a calculation based on the dollar to evaluate their incomes, savings and the value of other assets. We need to change people’s mentality away from using the exchange rate as an anchor,” says Mr Akishev.

In fact, dollarisation has declined steadily over the past nine months, from 80% of personal loans to 66%, with the total deposit ratio in foreign currency falling from 70% to 57%. “We have managed to stabilise dollarisation,” says Mr Akishev. “This is a good result, and the process will continue. Macroeconomic policy should be based on a pragmatic and common-sense view of what is going on. As a central bank, we have to provide adequate monetary policy. We are responsible for price stability on the market, but that is difficult to safeguard when the dollarisation level of the individual deposits is more than 80%.”

Bank consolidation

As banks face greater capital adequacy levels and persistently low prices for oil and other commodities, they can expect little help from the chairman of the NBK. Mr Akishev is clear that a number of the country’s 34 banks will most likely close or merge. “We do not think that a specific number of banks is an appropriate target for any central bank,” he says. “Sometimes banks want to merge; sometimes we may want to split a bank. But the decision is always based on economic considerations, not on a superficial target. We try to ensure that the system consists of healthy and solvent banks that are doing what they are meant to do,” says Mr Akishev.

Ten of Kazakhstan’s banks control 80% of the country's total assets, leaving a large number of banks with small operations. These are likely to come under pressure, not least from changing regulations. Mr Akishev believes that the implementation of tougher capital ratios “will probably lead to a smaller number of active banks through mergers”.

Low commodity prices will also hasten the consolidation process, he asserts. “It’s easy to operate in a banking system that has been shaped by oil prices of more than $100 a barrel, but it is much harder to find space for commercial banks in a shrinking economy, based on oil at $50 a barrel. Therefore, a reduction in the number of banks is an inevitable process.” Fewer banks would also make regulation less of a burden on the national budget, he concedes. “It’s too costly for the regulator to supervise so many different banks when just 10 hold more than 80% of the assets,” says Mr Akishev.

Some shareholders will decide that they cannot afford to meet the capital injection requirements of Basel III in Kazakhstan. “Shareholders will be required to inject new capital. I don’t expect small banks to receive support from their shareholders, leading them to look for mergers,” says Mr Akishev.

Tackling bad loans

The chairman takes the same tough line on banks with high levels of non-performing loans (NPLs). There is no place for a government bailout, he says, because many banks brought the problem on themselves through unwise property speculation. NPL levels have declined sharply in Kazakhstan over the past five years, from 33% across the sector to today’s 8.4%, but need to decline further.

Banks who joined a programme initiated by the NBK to bring NPL levels to below 10% over two years face the risk of losing their licences if they do not meet obligations in time. “We have the right to fire the managers of those banks that fail to meet their deadlines. We can also revoke their licences,” says Mr Akishev. “Therefore, if a bank cannot demonstrate it has complied with the requirements laid down by the regulator by the end of the deadline, then it will have its licence withdrawn.”

He disagrees with calls from some senior bankers, such as Marc Holtzman, chairman of Kazkommertsbank, the country’s largest bank, for the creation of a ‘bad bank’ to assume NPL ownership. “I don’t think the government is ready to provide measures to finance mistakes and the inefficiency of some private commercial banks. We have already provided some means for banks to accelerate the process of writing off bad loans from the assets of the commercial banks,’ says Mr Akishev.

Tax and fiscal measures have had a limited effect, he adds. The chairman points to wider macroeconomic measures needed to deal with the NPL problem. “To achieve a sustainable reduction in NPLs, we need to address a number of related problems including property rights corruption, creditor rights protection, rule of law, tax administration and the efficiency of the country’s bankruptcy legislation,” says Mr Akishev.

Advising caution

Innovative measures are needed to enhance banks’ ability to provide long-term funding. These include the introduction of irrevocable deposits. Mr Akishev believes that this will encourage banks “not to be anxious about possible early withdrawal of money in return for increased remuneration”. He also advocates the revival of the securitisation of mortgage loans. But the governor is nothing if not cautious.  

“We do not want to achieve lending at any cost,” he says. “Credit growth for its own sake is not our objective. We want banks to lend wisely, to allocate capital where it can produce the highest social return adjusted for risk. We want banks to find borrowers with good projects and responsible management, and to serve and nurture such borrowers so they become the pillars of our economy. Banks can perform this function only if they are well capitalised, well governed and well supervised.

“That is why our first priority is the establishment of a healthy, well-capitalised banking sector,” he concludes. “This is the foundation on which everything else can be built. Without [such a foundation], credit growth would amount to building sandcastles.”        

Was this article helpful?

Thank you for your feedback!

Read more about:  Asia-Pacific , Asia-Pacific , Kazakhstan
Joy Macknight is the editor of The Banker. She joined the publication in 2015 as transaction banking and technology editor. Previously, she was features editor at Profit & Loss, editorial director at Treasury Today and editor at gtnews. She also worked as a staff writer on Banking Technology and IBM Computer Today, as well as a freelancer on Computer Weekly. She has a BSc from the University of Victoria, Canada.
Read more articles from this author