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Sunday, October 19, 2008

Kazakhstan's Goverment Assumes Powers To Intervene In The Banking Sector

After Iceland, Kazakhstan still has the highest risk of banks imploding, according to credit-default swap maintained by Bloomberg for 114 European and Asian banks. Kazakhstan's oil-led economy was also ranked as being the most vulnerable, along with Latvia, in recent report from RBC Capital Markets. The RBC classification was based on a study of bank reserves, current account deficits and private borrowing.

In part as a response to this situation Kazakhstan's government has now taken powers to buy shares in ailing banks and remove their remove managers, halt dividend payments and limit new deposits.

If the state moves to bail out a bank, it has the right to buy authorized shares equal to no less than 10 percent of traded shares including the stock acquired by the state according to the law published today in government newspaper Kazakhstanskaya Pravda.

The purchases are aimed to protect creditors and to stabilize the financial system if government-ordered corrective measures fail, the law says.

Kazakh banks posted a 61 percent drop in profit in the first nine months as lenders increasingly put aside cash to cover bad loans. Total net income at the country's 36 banks dropped to 71 billion tenge ($593 million) from a year earlier, when 33 banks reported income of 184.4 billion tenge, the Financial Supervision Agency said on Oct. 22. Kazakhstan's central bank announced last week that the government may invest $5 billion of its energy windfall next year in new bonds issued by commercial banks to ease a refinancing squeeze. The government may also purchase bonds issued by the National Wellbeing Fund, bank Chairman Anvar Saidenov was quoted as saying.

According to the plan outlined in the law, regulators are to alert banks when any of five key indicators reaches dangerous levels, including a drop in the ratio of liquidity to liabilities, the share of deposits in total obligations, and an increase in loans that are more than 90 days overdue. Banks must respond with an "early-reaction'' plan to address the problems.

If regulators are dissatisfied with the proposed plan, they can order the bank to cut staff, fire managers, limit new deposits, halt dividend payments, increase capital and restructure assets, among other measures.

However, the quality of any such intervention in the banking sector is open to questioning, and the effectiveness of one Kazakh state fund's investments has recently been put in question by the funds own chairman. The value attributed to the JSC Investment Fund of Kazakhstan has been effectively halved - the result of shoddy management and accounting practices, according to the fund's chairman said.

The fund allowed companies it invested in from 2004 to 2007 to buy back the state's stake after two to three years by returning the purchase price plus 9 percent annual interest, turning the fund into a ``source of cheap uncollateralized credit,'' in the view of Maksat Kabashev.

This arrangement led both companies and some fund officials to treat taxpayers' money lightly, said Kabashev, who took over the fund in January. While none of the companies the fund invested in ever made an effort to match the state's cash injections, fund managers ``happily'' counted ``mobile telephones, used plumbing fixtures, everyday items and even guard dogs'' as company contributions to their charter capital.

The fund, a unit of state development holding Kazyna, was formed in 2003 to help
Kazakhstan, holder of 3.2 percent of the world's oil, wean its economy off commodities exports. Its investments, originally valued at 32.1 billion tenge ($267.4 million), are now worth half that amount, Kabashev said. Ninety percent of the projects were financed between 2004 and 2006, and about 3 billion tenge were due to be repaid to the fund by this year. Only 390 million tenge has been received, he said.

``Today, 9 percent annual interest is a negative real rate, and you don't have
to be a great macroeconomist to understand the consequences of a negative real
rate on your return on investments,'' Kabashev said. ``It means the death of the
enterprise and loss of money'' because it restricts the fund's profit from
The fund's investments include a company that produces caps for beer bottles that is ``on the verge of bankruptcy,'' according to Kabashev. To recoup its losses, the fund may have to sell the assets contributed by companies. The European Bank for Reconstruction and Development declined to buy a stake in the fund "because of these reasons,'' Kabashev said.

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