Abstract
The Republic of Kazakhstan’s 2008 Article IV Consultation shows that banks have lost access to new external financing, credit extension has stalled, and growth has slowed. Nevertheless, Kazakhstan has considerable public financial resources to help it weather the current situation and the country is benefiting from high oil and commodity prices. A realistic assessment of the health of banks needs to be made and steps taken to mitigate risks, including by bolstering capital bases, strengthening bank supervision, and further developing the financial safety net framework.
1. The following information has become available since the staff report was issued. These developments do not change the thrust of the staff appraisal.
2. Recent data releases show that:
The CPI increased by 1.2 percent (m/m) in June, and by 5.7 percent in the first half of 2008. The year-on-year inflation rate rose to 20 percent in June, from 19.5 percent in May. Food price inflation was a little over 29 percent (y/y) in June, while non-food prices rose by 13.6 percent (y/y).
The current account swung from a deficit of $2 billion in the fourth quarter of 2007 to a surplus of $3.9 billion in the first quarter of 2008 due to a sharp slowdown in imports and higher oil prices. The financial account remained weak in the first quarter as bank access to external financing declined.
Official foreign currency assets have continued to rise. At end-June, foreign exchange reserves stood at $21.2 billion and NFRK foreign currency assets at $25.7 billion.
3. The National Bank of Kazakhstan (NBK) lowered its refinancing rate from 11 percent to 10.5 percent on July 1. It also announced that minimum reserve requirements would be cut from 6 percent to 5 percent on domestic liabilities and from 8 percent to 7 percent on other liabilities as of July 29. The cut in reserve requirements is expected to free up about T 90 billion ($750 million) in liquidity for the banking system. The NBK cited its desire to support credit expansion and growth and its expectation that inflation will ease in the second half of the year as the reasons for its actions.
4. In the financial sector, non-performing loans on bank balance sheets have continued to rise, reaching 16.4 percent of total loans (“broad” definition) at end-May, up from 15.3 percent at end-March (on the “narrow” definition also shown in the staff report, NPLs increased to 4.4 percent at end-May, from 3.7 percent at end-March). An investment fund based in the United Arab Emirates has recently announced its intention to increase its stake in Kazkommertsbank, Kazakhstan’s second largest bank, from 8 percent to 25 percent (the transaction still requires regulatory approval). Lastly, the Kazakhstan Deposit Insurance Fund (KDIF) has received a capital injection from the NBK of T 14 billion, almost doubling its capital to T 30 billion ($250 million).