Hodden collusion

The government’s new program has proven that its old claims about banks are still valid.

Around two years ago, Prime Minister Danial Akhmetov was already speaking on the necessity to reform the most advanced industry within the economy, as banking is usually considered. However, since Mr. Akhmetov never clearly stated what the core of those reforms should be, and how they should be implemented, his attack on the banks was successfully rebuffed. The most distinguishing aspect by which this story can be remembered is the open disagreement by then Vice Prime Minister Grigori Marchenko with his patron’s policy. The subordinate then voluntarily resigned from his high office, transferring to the side of the corporate banking sector.
For some time, this public conflict between the government and the banks subsided, and became evident again only after the recent presidential election, and the subsequent prolongation of Mr. Akhmetov’s prime ministerial authority. Actually, this issue may be narrowed down to two core issues: demonopolization of the banking sector and decreasing the volume of banks’ external liabilities.

Hunting for Sharks
The attack from the government was initiated by President Nursultan Nazarbayev’s statement on 18th January at a joint session of the Parliament: “In order to permit the non-energy sector of the economy to develop, the destruction of hidden monopolies is necessary within the metallurgical industry, the banking sphere… and others… Such hidden collusion is quite well understood by its participants. Now, we as well know what this is, and we need to destroy it so that banks may decrease reliance on [the issuance of] credits. We need to allow foreign banks to enter this sphere, so as to create niches for domestic companies.”
“There exists collusion among the largest banks – the refinance rate has not become lower, and liberalization of the banking system is not actually occurring… We have already spoken about this, but now is the time to seriously take on this issue,” added Mr. Nazarbayev a few days following the first meeting of the new government. On the next day, the Prime Minister’s turn came to make his own statement on the issue, “The state should overcome the monopoly in the market of banking services, as the relative asset concentration of the three largest banks permits them to preserve high costs for banking services, while maintaining their low quality. From now on, the government will pay particular attention to this sphere, which yesterday the President made clear.” Mr. Akhmetov also made statements on the necessity “to increase transparency within the banking sector, as it has been associated with the largest production enterprises, and with other participants within the financial market leads to ineffectiveness and risk within the [overall] financial sphere. No doubt, the monopolists operating within the banking sector will seriously [try to] counteract this initiative. I believe that the first and last names of these people are known to you.”
The stated intention of the government to devote all effort towards the demonopolization of the banking sector has been documented clearly within the Prime Minister’s report on the government’s 2006-08 Action Plan. Within this program, the government promises to take measures for further liberalization and increasing of competition in the financial sector in order “to make the business of banking more transparent and highly diversified, so that it might introduce new technologies and methods of service to clients.” Aside from the removal of certain restrictions on foreign banks operating on the domestic market, further proposed is the permitting of branches of such banks to work in the same capacities as local banks so long as the parent companies guarantee their stability. Additionally, in order to ensure more transparency within the banking sector, the supervision over banks is to be enhanced, particularly as regards ownership structure and interrelations with affiliated entities.

Money Pit
Remember at the end of last year, the then director of the Financial Supervisory Agency (FSA), Bolat Zhamishev, stated that the external debt of the banks comprises slightly more than 40% of the total volume of their liabilities, which in his opinion was a “quite acceptable level.” However, he has not quite turned out to be correct. The former Finance Minister, Arman Dunayev, replaced him, and when Mr. Nazarbayev was assessing the performance of the previous director, he stated that the “FSA had not operated effectively. All banks take on huge [external] loans by utilizing Kazakhstan’s high credit rating. Eventually, all this liability is added to the gross debt of the country. Nobody supervises this.” In his turn, the Mr. Akhmetov said that in 2000 the external liabilities of the commercial banks totaled US$268 mln, and by the end of 2005 were at US$10 bln, an increase by 35 times. He further went on to state, “I believe that this [increase in liabilities] will be followed by the worsening of [the banks’] credit portfolios and other risks within the financial sphere.”
Anuar Saidenov, chairman of the board of directors of the National Bank of Kazakhstan (NBK), stressed that the increase in Kazakhstan’s external debt is taking place against a background of the government decreasing its liabilities and state guarantees, meaning the rise is attributable to just the borrowing of banks and private enterprises. Though, to be honest, due to the high GDP growth rate and export volumes, the ratio of gross external debt to those indices “has somewhat improved.”
In order to fight against the evils of uncontrolled borrowing, the government has promised in its 2006-08 Action Plan to improve the system of indirect oversight of the external borrowing of banks. Namely, in order to control forex risks, the government is planning to limit the open currency positions of banks as per each type of currency, and to decrease excessive liquidity, while minimum reserve requirements are to be increased.

The Reply to Chamberlain
Following the above statements, no banks made an official reaction. Only Mr. Marchenko, now chairman of the board of directors of Halyk Savings Bank of Kazakhstan (HSBK – aka Narodni Bank), who is a radical opponent of Mr. Akhmetov, has openly said at a press conference what he openly thinks about the old government with its new program. He stated that the banking sector was promoted only because none of the previous governments ever reformed the sector. Mr. Marchenko, a former chairman of the national bank, added, “If any government ever touched the banking sector, it would have been in the same position as the rest of the national economy. Practically none of the statements by this current government had any supporting numbers, except one exclusion in which the statement on how the external borrowings of banks have increased by 35 times over the past few years.” In his opinion, the comparison with 2000 as a base year is “absolutely unacceptable,” as at that time CIS banks were practically not attracting any funds on the global capital markets, due to the financial crisis in Southeast Asia and the Russian debt default. “This is the same as if we were to compare the current oil production level with that of 1913. One can manipulate figures however he or she wishes, but the fact remains that the banking sector is the most progressive and advanced in the country,” explained the HSBK chairman.
With regards to the accusation of monopolization of the market, Mr. Marchenko does not agree with the executive branch as well. He has stated, “Anyone who works in the banking sphere knows very well that due to a number of historical circumstances and mutual claims, the three largest banks KazKommertsBank, Bank TuranAlem and Narodni, have never come to any agreement with each other. This is why there has never been collusion among the banks, which is due to the strict competition.”
Mr. Marchenko, a respected financier, mitigated his sharp comments with gratitude for the President’s will, and his support, which has allowed the creation of the most advanced banking system in the CIS over the last 11 years, basically from nothing. “Now, those people who have never done anything for the banking sector are trying to destroy everything with their own hands, and this can result only in rejection on the part bank representatives,” he states. As for the government, he recommended that it deal with other issues related to the economy, namely the diversification and effective realization of the Industrial and Innovation Program.
In the middle of the government’s campaign against the banks, there was held the annual of the Association of Financiers. Logically, one would have thought that the financiers would discuss current situation, and provide a unified reply, but nothing of the kind happened. Serik Akhanov, chairman of the association, only slightly touched upon the issue when he noted that the dialogue with the government will continue, and that firm discussions lay ahead.

Nevertheless
At the beginning of February, Standard & Poor’s (S&P), an international ratings agency, again increased the long-term credit ratings of the three largest Kazakhstani banks “due to the strengthening influence of the potential support factor on the credibility of those banks… The increased ratings reflect our opinion that the government of Kazakhstan would most likely provide timely assistance to these market making banks of the country in case they happened to be in a crisis situation,” believes Magar Kuyumzhan, a credit analyst at S&P, whose statement was quoted in a press release disseminated by the agency. To be honest, S&P stressed that the receipt of state support would be probable, but is not guaranteed. In the opinion of the agency’s analysts, such a probability is substantiated by the important role held by these top three banks in financing the economy of the country, as well as in the provision of banking services to the population. Besides, the “relatively favorable regime regulating the banking sector played quite a significant role.” Exactly towards what our regime is favorable remains unclear.
A positive sign with regards to the relationship between our government and the financial sector (though not directly referring to the commercial banks) is the joint statement made by the government and NBK on the basic directions for economic and social policy, which confirms the prognosis for economic indices for 2006. This was made on 4th March. Let us give a reminder that just last year, despite already established traditions, such a joint statement was not made, and everyone talked about this exclusion as a sign of the relationship between the government and NBK. The recent statement is distinguished by the promise to fight against overheating of the economy, which undoubtedly will include limiting external borrowing.

No Invasion
Demonopolization of the banking sector is no doubt a positive step, but nobody has yet stated exactly what this implies. Removing limitations on the entrance of foreign banks onto the market is the only measure that can be taken for strengthening the competitive environment. However, one should note that foreign banks are not exactly beating down the door to come into Kazakhstan. In comparison with international scales, this market is quite small and crowded. The only parties ever to announce their interest here are Russian financial institutions. Within Q1 2006, Sberbank Russia is expected to finalize its arrangement on the purchase of Kazakhstan’s Texakabank. Vneshtorgbank intends to acquire other banks in Kazakhstan, Moldova and Azerbaijan by the end of the current year. As regards Sibakadembank, it opened a representative office here. All of this should not affect those whom the Kazakhstani government refers to as banking monopolists. Just like two years ago, the government lacks firm and valid points in its appeals to financiers.