Kazakhstan's financial system remains vulnerable - IMF
30.10.09 18:39
/IRBIS, October 10, 09/ - In International Monetary Fund (IMF) mission visited
Astana and Almaty during October 21- 28, 2009 to review recent economic
developments and discuss ongoing policy responses and economic perspectives.
The mission met with government officials and representatives of the banking and
business communities. The mission would like to thank the authorities for the
frank and open discussions. The following statement reflects the views of the
mission.
Against this background, the economic recovery in Kazakhstan is also
expected to be gradual. Ongoing difficulties in the banking sector continue to
add to the fragile global environment in negatively affecting the economy, which
contracted by 2.4 percent year-on-year in the first half of 2009, according to
the latest official data. Although, decline in economic activity appears to have
bottomed-out and a boost in oil production may help restore growth in the last
quarter, credit expansion remains subdued despite ample bank liquidity, activity
in key sectors, such as construction and manufacturing, continues to be sluggish,
and consumer income and demand will pick up only with a lag. Given this
combination of factors, IMF staff still expects the economy to contract for the
year as a whole by 2 percent, but risks to this forecast are on the upside. The
recent rebound in commodity prices, a record grain harvest in October, and the
prospect of additional anti-crisis spending by year-end provide a more optimistic
outlook for growth in 2010.
The financial system remains vulnerable and must be placed on a sound
and sustainable footing. With slow economic recovery, non-performing loans
have risen significantly and bank asset quality is expected to continue to
deteriorate, placing additional pressure on balance sheets. Recent measures to
raise bank capital requirements and to discourage lending and borrowing in
foreign currency are welcome. Nonetheless, a more comprehensive strategy
geared toward restoring confidence in banking system is necessary. Central to
these objectives is the resolution of bank solvency problems. In this regard,
crucial steps include finalizing the restructuring of Alliance Bank in line with
the term sheet agreement; meeting the December 7 deadline for agreeing with BTA
Bank creditors on the term sheet; moving swiftly through the rest of the
restructuring process; and taking decisive action should similar circumstances
arise in other financial institutions. As these processes move forward, public
sector should continue to play a supportive role in the banking system. This
assistance should be provided in a transparent way to ensure that balance sheets
reflect their real positions, and that all assets are adequately provisioned.
Strong regulatory and prudential frameworks, and corporate governance
are crucial in improving the health of the financial system. The Financial
Supervision Agency (FSA) should be duly empowered with the authority, legal
protection, independence, and resources to credibly conduct its mandateЧ
including the ability to enforce regulations and take early corrective actions
when required. This encompasses the further development of its supervisory and
onsite inspection capabilities. Moreover, FSA should explore diverging from a
compliance-based approach to supervision and moving to a modern, risk-based
methodology, paying greater attention to the need for effective corporate
governance, transparency of shareholders, fiduciary duties of directors, risk
management at banks. The envisaged legislative reform is a crucial step in this
direction.
Inflation is well contained and the current exchange rate peg to the U.S.
dollar remains appropriate until problems in the financial sector are
resolved. Weak domestic demand and international prices will keep inflation low
in the near term, but the National Bank of Kazakhstan should ensure that real
interest rates remain positive to support depositor confidence. The external
position is expected to remain supported by continued foreign direct investment,
particularly in the energy sector, the rebound in oil prices, and the new sources
of bilateral financing. Notwithstanding these ample sources of foreign exchange,
the knock-on effects from previous decline in oil prices and dampened external
demand will result in a current account deficit this year, before moving to a
modest surplus next year. The exchange rate peg to the dollar is supported by
the strong external position.
Fiscal policy has been correctly centered on providing support to the
economy, and will continue to do so in the near future. Responding to a
shortfall in tax revenue, the government has halted the anticipated reduction of
corporate income tax rates and postponed some spending measures in 2010.
Nonetheless, the scale of committed anti-crisis funds going forward is
significant, leading to a sharp increase in expenditure and to a loosening of
the budget position. The focus should be on the efficiency of spending and the
adequacy of financingЧto ensure that the quality of projects is consistent with
the growth objectives. Since the start of the crisis, Samruk-Kazyna has been
playing a key role in supporting the economy through investments in bank equity,
infrastructure projects, and assistance to public companies. The new approach to
fiscal policy should incorporate these operations and their corresponding
financing into the analysis to ensure accurate assessment of the impact of the
fiscal impulse on the economy, timely action at calibrating the stimulus-oriented
spending, and proper recognition of potential contingent liabilities.
The post-crisis stage leaves Kazakhstan with three main medium-term policy
challenges:
- Restoring confidence in the financial system while withdrawing public
sector support. Private domestic savingsЧrather than external borrowing or
public sector resourcesЧshould become the primary source of financing of
productive activities. This will require efforts to deepen domestic financial
marketsЧincluding the bond market for non-bank sectorsЧnot only to
encourage the demand for holding and transacting in tenge, but also to
promote risk diversification and the development of hedging tools. A newer,
more stable and sustainable financial system may also have greater foreign
participation. External borrowing by banks and non-financial institutions
should be carefully managed, and the public sector should start designing a
transparent and coordinated exit strategy from its equity positions in banks.
Effective communication with domestic and foreign markets during this
process is essential.
- Gradually withdrawing stimulus-oriented spending and increasing saving
of future oil revenues. Removing the fiscal support as the economy recovers
will allow a healthy return of the non-oil deficit to a sustainable level.
Expenditure priorities and sustainability of the fiscal stance should be
assessed by using a unified approach that includes all fiscal transactions
(including those off-budget) within a medium-term framework. The optimal
combination of savings and use of commodity revenues should be
determined in this context. While the use of savings in the oil fund for
mitigating the crisis was appropriate, the medium-term budget should limit
the reliance on oil revenues and allow the issuance of government securities.
These securities would offer investment alternatives to market participants
and provide a benchmark for the transaction of other domestic assets.
Steady saving of oil revenues would help insulate the economy from swings
in commodity prices, allow for countercyclical fiscal policy, and encourage a
rise of economic diversification.
- Allowing greater exchange rate flexibility. As confidence is restored and
the financial system stabilizes, more exchange rate flexibility would help
enhance the effectiveness of monetary policy and the economy's response to
external shocks, such as commodity price movements and exchange rate
developments in trading partners. In preparation for this move, authorities
will need to further develop monetary policy instruments, improve the interest
rate transmission mechanism, encourage deepening of the foreign exchange
market, and promote better management of exchange rate risks by
developing a futures and forwards market.
[2009-10-30]