TBY talks to Grigori Marchenko, Governor of the National Bank of Kazakhstan, on key developments in monetary policy and the strength of the local financial system.
TBY Over the past three years the Kazakhstani banking sector underwent significant restructuring. In light of the government’s policies, how would you assess the evolution of the sector’s resilience and public confidence in the banking system?
GRIGORI MARCHENKO First of all, we should underline that the processes of restructuring did not concern the system as a whole but only three banks, with only one of them being systemically important, and remaining so.
The influence of the world crisis on Kazakhstan’s banking sector resulted in an overreliance on external borrowings and liquidity shortages, a weak deposit base for maintaining lending activities, a concentration of risks in loan portfolios, and inadequate market discipline. In order to minimize systemic risks and stabilize the banking sector, the National Bank, the government, and the Agency of the Republic of Kazakhstan on the Regulation and Supervision of Financial Markets and Financial Organizations (the Agency) adopted the Joint Action Plan for the Stabilization of the Economy and Financial Sector for the Years 2009-2010, which provided for the allocation of $10 billion from the National Oil Fund to finance the most important sectors of the economy, mostly via bank financing.
During the crisis, the most significant pressure was brought to bear on some large banks such as BTA Bank, Alliance Bank, and Temir Bank, all of which were exposed to risks arising from external borrowings, foreign assets, and intra-group transactions. In order to offset the systemic risks associated with these banks, a procedure to restructure their external obligations was initiated. Overall, the process of restructuring was recognized by the world community and took approximately one-and-a-half years. Its completion has become one the most important signs of the normalization of the situation in Kazakhstan for financial market participants.
In fact, not only the financial condition of the banks under restructuring has improved, but the level of systemic risks throughout the entire financial sector has also decreased. The share of external liabilities in the total liabilities of the banking sector fell significantly from 53.3% as of January 1, 2008, to just 21.1% by April 1, 2011.
The most important result of measures undertaken by the National Bank, the government, and the Agency has been the retaining of public confidence in Kazakhstan’s financial system and the prevention of a run on the banks. Deposits have been growing steadily for the last three years to reach KZT7,239 billion as of April 1, 2011.
Thus, efforts made during the crisis period have helped resolve the most serious problems, improving the condition of the financial industry and restoring public confidence in it.
What is the National Bank’s policy stance going to be as the regulator? What is the new role envisaged for the Regional Financial Center of Almaty (RFCA) authority?
At the beginning of the crisis, the National Bank was not responsible for the supervision and regulation of the financial system because in that period the regulator function was fully exercised by a specialized body, namely the Agency. Therefore, the functions of the National Bank were limited to conducting monetary policy, maintaining the domestic currency exchange rate, and exercising exchange rate controls. From the start of the crisis, all the efforts of the National Bank in the field of stabilizing the financial system were aimed at maintaining national currency stability and supporting the financial system with liquidity.
As for the new goals of regulation, some new focuses were singled out by the results of the crisis. The Conception of the Post-Crisis Development of Kazakhstan’s Financial System includes all the new directions of work in this area. We should especially underline the establishment of more restrictions and controls on intra-group transactions, ensure additional requirements for the transparency of a bank’s large clients, and place additional requirements on bank conglomerates’ structure and management.
As for the functioning of the RFCA, nothing will change, excluding administrative arrangements—the function of developing the RFCA was transferred to the National Bank. To implement this function, we are creating a specialized new body under the National Bank.
Irrespective of the fact that the functions of the Agency and those of the RFCA have been transferred to the National Bank and a single financial regulator has been created, the conception of the development of the RFCA remains topical, and work on its implementation will continue.
The participants in the financial market will retain the benefits that had been introduced for the stock market. In addition, the infrastructure of the financial center will keep functioning. Work is presently being undertaken to implement a program to stage a public share placement in national companies for all the people of the Republic, i.e. stage a “People’s IPO”. The implementation of this program will give extra impetus to the development of the RFCA project and will make it feasible to attract as many citizens as possible to the intended issue of securities in companies under the National Welfare Fund, or Samruk-Kazyna.
To date, a pressing issue remains the further development of Almaty as a financial center for Islamic financing. All these measures will enjoy successful and accelerated implementation under the auspices of a single regulator, this being the National Bank.
The increase of commodities prices brings the risk of the tenge appreciating, which might hinder the competitiveness of Kazakhstan’s non-extractive sectors. What strategies are being pursued by the National Bank to stabilize the value of the tenge?
In order to prevent the tenge from dramatically and significantly strengthening, the National Bank has been buying foreign exchange in the domestic market and has been sterilizing it through its instruments for the past few months. At the same time, the National Bank adheres to a policy aimed at both securing the stability of the national currency and preserving a favorable competitive environment for domestic manufacturers.
In this context, the fact that the foreign currency tunnel was given up in favor of a controlled float in February 2011 will (a) enable the tenge to strengthen, if necessary, at an equilibrium level and provide “comfort” to all sectors of the economy; (b) allow gold and FX assets to grow; and (c) secure long-term stability in the FX market.
What are your expectations from the second wave of privatizations?
I believe that in privatization, property comes out of state ownership and passes over to private ownership. Minority stakes will be offered in a “People’s IPO”. Control will remain with the government, and so I wouldn’t call this a new wave of privatization. This is important and the National Bank supports it so as to privatize stakes in several companies, expand the equity holdings of pension funds, and allow individual investors to improve the overall equity culture in the country. We do not expect that there will be thousands of people involved in this step, but it is still important in developing the equity culture in Kazakhstan.
How do you see the Kazakhstan Stock Exchange (KASE) evolving over the coming five years?
We believe in the concept of a concentration of the financial markets. We have one stock exchange, and trading will definitely take place there. We have very good working relations with the KASE, which will play a central role in all of these developments. The central depository regulator will also play an important role. This is a joint effort of the government, Samruk-Kazyna, and the KASE, and we will be also involved either as the National Bank or through the payments system, which is our clear responsibility. We have around $1.2 trillion flowing annually through our payments system, which is one of the better figures—if not the best—in the entire Central Asia region.
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