ANALYSIS: Kazakhstan has achieved its goals by letting tenge free a year ago

/Almaty office of REUTERS, Apr.6, 00, Larisa Kokovinets/ - The year that Kazakhstan lived from the moment when tenge was set "free" allowed it to achieve the growth in economy, which is noticeably tied up to external markets, to stabilize financial market and to harden the banks for whom devaluation was a good test for toughness even if it was not a surprise for them, believe the participants of the market. By analyzing the results of the year, the National Bank believes that these results could not be as noticeable if the devaluation of tenge was not accompanied by improving situation on the world commodity markets, where Kazakhstan exports its major products - oil, metals, grain. "Nevertheless, the major factors that affected economic growth are an improvement in the conjuncture of the world market and a rich harvest in agriculture (16 mln tons of grain against 7 mln tons in 1998)", is said in the comments of the National Bank to REUTERS. In 1999 GDP rose 1.7% to the level of 1998, when it fell 2.5%. In April of last year Kazakhstan switched to free floating system of exchange rate. The National Bank said at that time that it would not restrain tenge intentionally anymore in order to protect domestic producers and the exporters. In a few days, beginning from April 5, the exchange rate of tenge sharply fell to 100-115 tenge per dollar from 88.3 tenge per dollar at the last trades prior to the devaluation. Depreciation of tenge by the end of 1999 has reached about 40%. By the data of the National Bank, which keeps the statistics of the payment balance of the country, exports rose 2% in terms of value to the level of 1998, at $5.99 bln. For the first time in last four years trade balance equaled positive $0.34 bln compared to $0.8 bln deficit. Deficit of accounts of current operations shrank more than 7 times against 1998, at $171 mln, or 1.1% of GDP (5.5% in 1998). As a result, positive payment balance allowed the country to finance $87 mln increase in the reserves of the National Bank. As of December 31, 1999 gold and currency reserves of the National Bank were at $2.003 bln, providing financing of 3.6 of goods and services imports. "Switch to free floating exchange rate of tenge gave the results the government was counting on, if the devaluation is not considered delayed", said the head of Association of financiers of Kazakhstan Daulet Sembaev to REUTERS. IT WAS NOT A SURPRISE "This April devaluation should be done earlier. It was obvious that all the banks were waiting for it. Due to low level of trust to national currency, most of our loans turned into currency loans or were tied up to a currency. As a result, the banks had very high risks and we lost the trust in tenge, in its stability that was achieved previously", Sembaev believes. Devaluation of tenge was not a surprise. The necessity of the devaluation became clear after the crisis in Russia, which remains as the major trade partner of Kazakhstan. The National Bank says that trade with CIS countries is more dependent on the real exchange rate of tenge, whereas exports to other foreign countries are more dependent on the dynamics of the world prices. As a result of overvalued tenge Kazakhstani goods could not compete with Russian goods. Kazakhstani market was saturated with Russian goods - milk, butter and red caviar "at very low prices". Local industry kept warning the government of inevitable bankruptcy. Financial institutions were ready to lose during the devaluation period, however, they understood the choice made by the government in favor of domestic industrial companies and the exporters, who had to improve their financial situation noticeably. Moreover, the budget of Kazakhstan, which was under the revision of the government 10 days after its approval in December 1998, had a serious deficit of funds. "And it was the question for the government whom it had to support in this case. But, based on the fact that finance is the superstructure over the industrial base, it was decided to support the industrials", said Iskander Erimbetov, vice-director of Kazkommerts Securities. By the data of the National Bank, initial effect of the decrease in the exchange rate was a sharp fall in imports in the second quarter of 1999. As a whole imports fell 15% within a year, at $5.64 bln. "After the devaluation exporters began to receive 1.6 times more dollars for their internal expenses. I believe it is beneficial for the budget", said Sembaev. In the opinion of the banks, the situation on financial market of the country has stabilized when the exchange rate began to depend on market forces. During the devaluation of tenge monetary policy of the National Bank allowed it to shrink the inflation in the second half of 1999. Consumer price level increased 20.8% within a year after free floating exchange rate was introduced. The most growth in inflation was registered in the second quarter of 1999. BANKS HAVE LOST BUT NOT CONFUSED "It has not been the best year for the banks", said one of the bankers to REUTERS. After April 5 the quality of loan portfolios of the banks began to deteriorate, and the banks had to increase the provisions, and due to exchange rate differences their shareholders' equities and authorized capitals decreased. "It was a real wash-out of money, because it required "live" money to be spent. We had to add to the provisions, and the provisions are "live money", said the banker. During the adaptation period of the banks to new situation with the currency the National Bank reduced the minimum reserve requirements to 5% from 10%, which, in the opinion of the National Bank, allowed the banks to maintain their normal liquidity. "In general, introduction of free floating exchange rate did not have a negative impact on the liquidity of the banks, that is they did not have difficulties related to the short term liquidity or shrinkage of resources", is said in the comments of the National Bank. By the data of the National Bank, aggregate equity of Kazakhstani banks decreased to $511 mln from 568 mln in 1998 in terms of currency. The proportion of "standard" loans fell to 60.8% from 56.8%, and the proportion of "doubtful" or "bad" loans rose to 38.3% from 34.7% and to 4.9% from 4.5%. "Thanks God, and owning to the National Bank our banks have stood this situation. They, of course, had to restructure some loans, give prolongation and the quality of loan portfolios of the banks has decreased, that is the risks have risen, but none of the banks "collapsed". With some financial losses, but the banks had successfully ended the year", said Daulet Sembaev. The bankers say that the banks had to look for additional reserves, including intellectual ones. "The management did its best. From this moment (devaluation) the banks are carefully examine business-plans. The projects became more well grounded after the devaluation. Thanks to the fact the National Bank was making the supervision more strict prior to the devaluation, the banking system had been able to clean itself from doubtful banks. Only those banks were left that could survive in such situation", said the banker. The number of banks fell to 53 from 71 beginning from March 1999 through February 2000 mainly due to the mergers or reformations into loan partnerships. Aggregate assets rose 9.6%, at $2.4 bln in currency terms, informed the National Bank.