Over the last ten
years the Kazakh economy has been developing with
up's and down's in a very impressive fashion. With
this in mind could you give to our readers an assessment
of Kazakhstan's macro-economic fundamentals: growth,
inflation, fiscal deficit and balance of payments,
and what particular role has the National Bank played
in this?
Definitely there were several phases in our development
in the last ten and a half years after we got
our independence. At first it was all down hill,
because of the break up of the Soviet Union, the
break up of ties between companies and enterprises.
Inflation was very high - over two thousand percent
a year in 1993. Fiscal deficits were big and eventually
it was a very difficult time from 1991 through
1994. Then we managed to achieve macroeconomic
stabilization and started with reforms in the
banking sector in 1995 and also started with the
policy of attracting foreign direct investments
into major sectors of our economy, like oil and
gas and mining and metals. In 1996 the economy
stopped falling down. In 1997 we started to grow
- two percent growth per year. In 1998 we continued
to grow, but then there was this Asian crisis
and eventually the Russian crisis of August 1998.
And this made the whole situation quite difficult.
There was again contraction in GDP in 1998, though
a minor one of around 1,9%. In the second half
of 1999 we started to grow again after oil prices
rebounded and also after we have done our devaluation
in April in order to compensate for the Russian
devaluation of 1998.
So as I said, starting from July 1st, 1999, if
you take the last three years to July 1st, 2002,
there was a rate of annual growth of 11%. There
are several reasons in the change of our fortunes.
First of all there is a stable macroeconomic environment.
Inflation is in single digits. Last year inflation
was 6.4%. Current 12-month inflation as of July
1st, last twelve months is about 5.8%. We have
announced last year that inflation for this year
would be in the range of 5 to 7% and in the next
two years - in the range of 4 to 6%. So it is
still not as low as in developed countries, but
we still have some structural changes taking place.
We feel that it will be counterproductive to try
to get inflation to the level of 2 to 3% and that
could be an infringement on growth. Exchange rate
has been also very stable in the last two and
a half years. Basically, we are tracking the so-called
'real effective exchange rate'. So we take developments
in twenty countries, which are our major trading
partners, and for instance if you take 1996 for
100%, now this real effective exchange rate is
around 94%. We try to keep it fairly stable in
real terms. In nominal terms it is depreciating
somewhat against US dollar, but relatively slow.
Last year depreciation was 3.8%, this year we
are expecting 3.5 to 4% depreciation, which is
basically again the difference between the level
of our inflation and the level of US inflation.
That means that in real terms Tenge is fairly
stable against US Dollar.
Kazakhstan has successfully achieved macroeconomic
stabilisation, and importantly also is that the
exchange rate of the national currency - Tenge
- is stable. Could you explain to our readers
the impact a flotation in 1999 has had so far
on the local investment climate, and which part
does the National Bank play?
That was the forced decision as we really could
not compete in prices with products from Russia,
Ukraine or Kyrgystan, who all devalued in 1998.
There were no domestic reasons for this devaluation,
but external reasons were strong. I mean when
we were all going to schools and reading all these
books on macroeconomics about small and open economies,
we always thought that this is about Belgium or
Netherlands. But the truth is that Kazakhstan
is also a small and open economy. Geographically
we are a huge country, but as an economy we are
fairly small. Last year GDP was 22.5 billion US
Dollars. This year we are expecting about 25 billion
dollars GDP, may be slightly more. Exports are
almost half of our GDP. That means exports plus
imports and including services are almost over
hundred percent of GDP. In that sense we do depend
on international trade quite significantly. Again
our borders are fairly open, especially our border
with Russia, which is about four and a half thousands
miles long, going on a flat terrain. It is technically
next to impossible to police or to manage that
border and to control the flow. So whether we
like it or not, whether Russian authorities like
it or not, if we are honest with ourselves, it
is next to impossible to efficiently control this
border. We do have this de facto free flow of
people, goods, and to less extent - capital.
We definitely depend on the situation at the international
commodities markets, especially on oil, but also
on metals. That is why year and a half ago there
was a decision taken to create a stabilization
fund. It is called National Fund. It has now over
7% of GDP. In dollar terms it is 1.66 billions
US Dollars. We do manage it for the Government
and invest mostly through external managers. We
tender it out and likes of CreditSwiss, UBS, Deutsche
Bank, Meril Lynch, and Morgan Stanley are managing
these both fixed income and equity mandates for
us. It is hundred fifty million dollars each mandate.
This National Fund has two roles. One is stabilization
and the other - savings for future generations.
In that sense we are already protected against
swings in oil prices, I think we have enough money
in the National Fund to protect the budget for
twelve to eighteen months, even if oil prices
go to as low as ten dollar per barrel. In 1998
when it happened already we were not protected
and that is why the Government had to cut the
budget expenditures three times. That was very
painful and in order to prevent this from happening
I think it is a very good arrangement. Also for
us as a Central Bank it is extremely helpful,
because as I said there is about 1.65 billion
in it and overall money supply, M3, in the country
is around 4 billion dollars. So if this money
were not invested abroad through the National
Fund, it would mean that there would be almost
35 % growth in money supply and that would definitely
have some inflationary impact on the economy.
And we would not be able to keep inflation as
low as it is right now. So it is a major sterilization
tool for us and it has been very helpful for overall
monetary management.
Our major role as a Central Bank is definitely
the monetary policy. We believe that we have been
doing it fairly well. For instance, if you look
at accumulated inflation in the last six years
we are slightly better than Hungary and slightly
worse than Poland. So in fact we prefer to compare
ourselves with the countries of Central Europe
and not with the rest of CIS. If you take a look
at accumulated devaluation of the currency in
the last six years it is the same result. We are
slightly better off than Hungary and slightly
worse off than Poland. So I mean we are in that
group of countries.
We are also responsible for all financial supervision
and in that sense we are like Monetary Authority
of Singapore or Banka Nigara Malaysia, which also
have this responsibility. However, differently
from them we are more independent. We are also
responsible for payment system development. The
World Bank, EBRD and Bank of International Settlements
have accepted that we have the best payment system
in the whole of CIS. And basically there are three
segments in it. One is this large value transfer
system, which is currently real time gross settlements,
based on the Swiss model and it is done real time.
The second segment is retail smaller payments,
which is done within two days and it is cleared
through the sort of American type clearing house
here in Almaty. And the third segment, which is
very important and growing fast, it is payment
cards. We have already about 1.4 million credit
and debit cards in circulation. And again both
Visa and Europe Pay have publicly admitted that
Kazakhstan is more advanced than other Central
European countries in this area. So for the population
of 14.8 million as I said we have 1.4 million
cards and about 1.3 million card owners.
Investors when they look at Kazakhstan have
a tendency to look first at the oil and gas sector.
However, there are a lot of opportunities in banking
sector as well. Could you give our readers an
assessment of the strengths of the banking system
in Kazakhstan?
The problem is that people assume a lot of things.
For instance, if you look at the oil and gas sector
for us it is only 15% of GDP. So it is not as
overwhelming as in some Middle Eastern countries.
As for budgetary revenues, they take about 25
to 30% from the oil and gas sector. It is very
substantial figure, but it is not over 50% or
70% like in some countries.
Traditionally Kazakhstan has been more a mining
country than an oil country. And oil has basically
overtaken metals as the most important part of
our exports in the year 2000. Throughout all the
90s we were exporting in dollar-terms more metals
as a country than oil. Oil has been growing faster.
It has been growing by 20 % in the last few years,
but if you take last three years - food processing
has been growing 30 to 40 % and the financial
sector has been growing 50 % to 70 %. So the financial
sector is by far as the fastest growing sector
in our economy. The banking sector, if you take
the same time frame - last two and a half years
- has tripled its assets. Deposits in the banking
sector have increased by 3,5 times in dollar terms.
Household deposits have increased by 4,5 times.
So, there is much more trust and confidence of
the population in the banking system. Also payment
system works very efficiently. There are much
less barter and cash transactions. That is also
very helpful. When people use payment cards and
people use the non-cash payment system settlements,
which means that people use less and less cash.
Cash is the most important part of monetary base,
which we are tracking. So these developments are
also helpful to put a lid on the cash or MO growth
in the economy and that is very helpful to keep
inflation down. These things come together.
We started introducing Basel Committee recommendations
on capital adequacy, single borrower exposure,
liquidity rations and things like that in 1995.
We have been applying them since. There was a
major consolidation in the banking sector. We
used to have two hundred thirty banks in 1993.
Now there are thirty-eight banks de facto operating
in the country. Technically, there are forty-two,
but four of them are being converted into credit
unions. The banks, which do audit using one of
the Big Five companies, account for over 95% of
assets of the banking system. And I think that
in the next year or so we will get 100%, like
in Singapore and few other countries. Eight banks,
larger banks, have already ratings from one of
the three international rating agencies. So the
quality of loan portfolio is fairly stable. Standard
loans account for about 75%. And there have been
an explosive growth in loans. In 2000 it was 84%,
and last year it was 77%. But it is a lot of bouncing
back and catching up. For instance, bank loans
to GDP currently are a bit less than 15%. There
was a lot of growth in the last two to three years,
but it has been a lot of catching up from the
level of development, which we had in the 90s.
In several interviews you have been very adamant
stressing the importance of transparency within
the banking system and in particular within the
National bank. Could you explain to our readers
how do you accomplish an adequate level of transparency?
I think that we try to do a lot of things by example.
We were the very first institution in the whole
country, which has done their audit using the international
audit company in 1994. In 1996 domestic banks have
done that and as I said now almost all banks in
this country do the same. We have also adopted a
law on consolidated supervision, I means we developed
this draft legislation and pushed it through the
parliament. So now financial groups are supervised
on both solo and consolidated basis. They present
their consolidated accounts to us quarterly and
annually. We also have demanded that there should
be better corporate governance in banks. And all
large shareholders also should give us financial
reports. So if someone directly or indirectly controls
more than 10% in a bank or in insurance company,
we should be sure that these people do have their
books in order and that they are also transparent
and have proper disclosure. If they are not we can
demand that they sell their shares within three
months which is stipulated by a law. And also lately
there was first a recommendation and now it is a
regulation that banks and other financial intermediaries
should introduce risk management systems. And so
basically auditors while auditing them for the year
2002 should also confirm that their risk management
systems are adequate. The banks are very busy introducing
these risk management systems now. It is basically
again within the overall approach of the Basel Committee,
both Basel 1 and what is being discussed about Basel
2. There is a lot of concentration on corporate
governance, on consolidated supervision and on risk
management. |
The Central bank
was involved in many changes looking really at examples
around, so that you made sure that things really
work properly. What has been the approach?
Yes, our approach is very simple. Whether implement
international standards or if the international
standards are not available, we implement best
practices. In that sense as I said the payment
system - if the Swiss example is the best - we
have take it. We look at the US model of the mortgage
market. In the area of housing savings banks we
looked at the German experience with Bausparcassen.
And we apply the German law across the board.
In the area of postal savings we looked and we
decided that Japanese were the most successful.
Basically, our post is trying now to develop this
postal savings scheme. In respect of the banking
supervision Basel Committee requirements - we
apply them across the border. In respect of insurance
there is an International Association of Insurance
Supervisors also based in Basel. They published
in 1998 their 17 International standards. We apply
them across the board from the year 2000. I think
that instead of trying to invent the wheel, let
us follow the best example available. In respect
of pension system we looked at Chilean, Swiss
and Singapore examples and we basically made something
in between. And I think that has been the reason
of our success.
For a small country that is the only way. In large
countries like Russia or China, in which their
own models are already introduced, it is impossible.
They say why do you think we are so stupid, we
are not able to develop a decent model by ourselves.
Sometimes they waste five or ten or twenty years
trying to develop an alternative model. In countries
of our size, economically, it does not really
make much sense. And I think that we came to that
realization fairly early, in mid nineties and
we are now reaping the benefits, at least in the
banking sector, in the area of FDI and in the
area of pensions. As I said in insurance sector
we started later, only in the year 2000 and because
of all these international developments we are
not so successful, but again it is an external
factor.
Recently, there has been talk of introducing
a single currency in the territory of the Eurasian
Economic Community. What are your views on this,
and do you expect more financial cooperation between
Kazakhstan and its neighbours?
I have expressed these views on many occasions.
I think that right now it is purely a theoretical
discussion and there were no practical steps in
that direction yet. But with the Euro becoming
a fully operational currency, with Persian Gulf
countries now discussing a possibility of introducing
a common currency, with some countries in Latin
America adopting or possibly adopting the US dollar,
it is quite obvious that in the next five to ten
years we will have fewer currencies in the world
and several strong currency blocks. It is obvious
that these are economies of scale. I mean that
if you want to have a stable currency, this stable
currency should be serving a large economy. One
way is to grow organically, but as I said with
25 billion dollars of GDP now it would be a sort
of stupid to expect that just within five years
we will have five hundred billion dollar GDP economy.
A country cannot really grow that fast.
So, at some point in time we really have to look
at a possibility of having a common currency.
Whether it is within the Central Asia or within
this Eurasian Economic Community, which includes
Russia, Byelorussia, Kazakhstan, Tajikistan and
Kyrgyztan or just between two or thee neighbouring
countries, or within the whole of CIS, I do not
know, but I think, that at some point in time
we shall be discussing it seriously. The key is
definitely a set of criteria. Because you cannot
adopt someone in the currency block if this country
has a fiscal deficit of 7 %, inflation of 50 %
a year and things like that. I think that we as
a country, as I said, with a fairly low inflation,
with a very low fiscal deficit, which is 0.1-0.2%
in the last two years, we are pretty close to
needed criteria and with a governor, which is
fairly low to GDP. Actually Kazakhstan is one
of the very few countries, in which accumulated
overall foreign assets of the country - National
Bank assets plus National Fund assets - are currently
around 4.5 billion US Dollars. Whereby overall
sovereign foreign debt and sovereign guaranteed
debt is now about 3.8 billion. Technically as
a sovereign country we are already a net creditor
to the outside world. In that sense we have a
very good position both on monetary side and on
the fiscal side. And also rates of growth are
very impressive in the last three years.
Definitely, it would be important to explain to
the public that when we are joining the currency
block that will not spoil our own development
and our own growth. I think that first we need
to establish who are the countries, willing, because
it is mostly a political decision. It is not the
central banks, which are deciding this or not
even governments. It is the parliament of the
country and I think that a referendum, like it
was done in Europe, is the best way to understand
whether the public wants to join a currency block
or it does not. But in some point in time, as
I said, in the next five years we have got to
start discussing it seriously and may be making
some practical steps in that directions. And in
the next ten years, I think there would be some
sort of common currency in the region. At least
there is a lot of sense for that economically.
Your country has special relations with a wide
rang of International Financial Institutions, such
as the IMF, the Asian Development Bank and the EBRD.
Could you highlight these relationships and how
specifically does Kazakhstan benefit from their
financial backing?
For us as a Central Bank the most important partner
is definitely IMF, because they have been traditionally
responsible for monetary and fiscal issues. In
May 2000 we have fully prepaid all our obligations
to IMF. We are one of the very few countries in
the region that does not have any debt to IMF
outstanding. And I think that has improved the
relations. We have graduated; we are not borrowing
anymore neither do we want to borrow. But we definitely
work closely with IMF on issues like capital account
liberalization, because we believe that we will
do in two or three steps capital account liberalization.
Not a big bang, because we have seen that in South
Eastern Asia in 1997 it really backfired. It would
be a step-by-step approach. IMF supports this
view. We are working with the on a possibility
of eventually introducing a sort of a formal of
inflation targeting. Currently we have a more
traditional monetary targeting approach and eventually
we could introduce the inflation targeting. And
also we are working with IMF on this unified financial
supervision. Currently all the financial supervision
has been put under the National Bank, but the
ideas is to spin off a separate unified regulator,
like it was done in Japan, Korea, Hungary, and
Scandinavian countries, United Kingdom, FSA. About
a dozen countries have done it. We are working
with them. Instead of picking IMF pockets - borrowing
from them - we are now picking their brain. And
that is, I think, a much better type of relations.
As for other institutions, like EBRD or IFC, they
have been working with a private sector. They
have been very much involved in various areas
of banking - providing credit lines, providing
some equity, developing financial leasing. We
also expect them and they are willing to play
more role in the areas of mortgages lending, in
the area of insurance. We have been very actively
working with them, but it is a private sector
involvement.
And as for World Bank proper and ADB I think they
should be playing and they are playing an important
role in infrastructure projects, but that is something
where we as a Central Bank are not much involved.
Now you as a Governor of the National Bank
have made quite a lot of accomplishments lately,
and you are known in the domestic as well as international
community. With this in mind what do you see as
your biggest achievement while being the Governor
of the National Bank?
This is a deposit insurance fund creation. Overall
household deposits were very low, because there
was, unfortunately, not much confidence in the
banking sector as a whole. Definitely, we did
a good job on, sort of, cutting inflation down.
Our exchange rate policy was sensible. But I would
say most rewarding, if that is what you mean,
was this. So, on one side we have created deposit
insurance fund on the other side we have tightened
banking confidentiality, legislation. And as a
result, as I said, household deposits have grown
by 4.5 times in dollar terms and people have brought
well over one billion dollars out their mattresses.
And I think that has been very rewarding an it
made also a lot of difference, because people
now get interest on their deposits instead of
just keeping these money in cash. This money was
invested into the real sector and that is being
one of the factors driving this phenomenal growth
of ours. As I said one factor was the macroeconomic
stability. Second factor was a very strong FDI.
For instance, last year net FDI was about 12 %
of GDP, whereby gross FDI was almost 20%. FDI
is very much going to oil and gas and mining and
metals. And the third factor has been this financial
sector. One is banking and the other very important
segment is accumulation pension system. I think
that creating this funded pillar in the pension
system was the second most rewarding thing. Now
they have over 1.45 billion US Dollars pension
funds and assets. And that is what is really driving
the development of corporate bonds market, the
development eventually of mortgage bonds market.
It was very helpful for the development of the
Kazakh sovereign Euro bonds secondary market and
things like that. So that made a lot of difference.
Banks and pension funds have accumulated 1.6 billion
dollars of new savings last year. And foreign
direct investments are basically foreign savings,
banks and pension funds have accumulated a lot
of domestic savings. And all this money flowing
into economy and you have increase in capital
investments of 29% in 2000 and 21% in 2001. It
is a classical story, very well known in Asia,
of high savings growth driving high investments
growth, driving high GDP growth.
So we are, as some people say using not the word
Tiger, but the word Snow Leopard, because that
is an animal, which lives in these mountains.
It is the smaller one, but may be more beautiful
than a tiger. I do not like this type of comparison
because then you always have jokes like "dead
tiger bounce". But we have been very content
with the way. GDP has grown in the last three
years and in a way the financial sector has been
growing. I would say the rewarding thing has been
this household deposit growth and the development
of pension funds.
On the other side, we have been trying very hard
to kick start our insurance market. And we have
been not very successful. Insurance sector has
been also growing fast. Last year insurance premium
growth was 54 %, but from a very low base. And
our policy was to attract several large foreign
companies, brand names in order to develop this
sector properly. And there have been some serious
discussions, but after September 11th they really
got cold feet. Some of them have not enough capital
and they are not interested in establishing new
subsidiaries in emerging markets. That has been
most disappointing.
So with all that you have said about the Kazakh
developments in mind, what would be your final
message to our readers?
I think that most important thing for all of
us to realise is that Kazakhstan in geographic
terms is one of the largest Asian countries. And
that has been something what we did not fully
realise when we were still the part of the Soviet
Union, which was very much Europe oriented. And
I think that it is not being realised by a lot
of people in Asia, that Kazakhstan in geographical
terms is the fifth or the sixth largest Asian
country. I think that developing this sort of
Asian factor of our external policies, of our
trade policies has been one of the most important
objectives in Kazakhstan, but I would not say
that it was the most successful one. We are separated
by China from the rest of Asia. Relationships
with China have been developing very well. But
relations with the rest of Asia, unfortunately,
are not.
Again, we are too far from places like Malaysia,
Singapore, Hong Kong and Thailand, but I think that
when people do realise fully that we are also an
Asian country, I mean that there is nothing people
can not do and there are modern means of transportation
available. So you can transit through China, you
can transit through Iran, you can fly some things
by air. That is the most important thing. All the
rest will take of itself. People coming here will
see the opportunities where to invest, and I think
that as I said - in FDI attraction we are one of
the most successful countries in the world, but
most of this FDI is coming from United States, number
two investor is Italy, number three is United Kingdom
and then Netherlands and South Korea, I would say
are taking the fifth place. And Turkey, I think,
is number seven. So Asian countries are not very
well presented, unfortunately, in the first top
ten of investors. Thirty five percent of FDI, if
you take the last five years, comes from the United
States. And their share is increasing, because of
their large involvement in the oil and gas sector.
The European countries, especially the UK, Netherlands
and Italy, are being very active. Canada is also
one of the top ten and Russia is one of the top
ten. As for Asian countries, as I said, it is only
South Korea and Turkey. However, it could change.
And I hope it is going to change. |
