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Reference ID Created Released Classification Origin
07ASTANA3025 2007-11-07 07:37 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

DE RUEHTA #3025/01 3110737
R 070737Z NOV 07

E.O. 12958: N/A 
Ref:  (A) Astana 1512  (B) Astana 372  (C) Astana 2765  (D) Astana 
2823  (E) Astana 2716 
ASTANA 00003025  001.2 OF 003 
1. (SBU) Summary.  The global reverberations of the subprime 
mortgage crisis in the U.S. have not passed Kazakhstan by.  Though 
most observers believe that the impact of the current turbulence 
will be limited and not threaten the country's long-term economic 
prospects, there are nevertheless shorter term challenges.  In 
particular, while the banking sector remains stable and the effects 
on the broader economy have been largely muted, the real estate and 
construction sectors have taken a hit.  On a more positive note, the 
global financial turbulence has staunched a liquidity glut in 
Kazakhstan's banking system, forcing a financial readjustment that 
may actually be beneficial.   More problematic for the country, 
perhaps, is a significant uptick in inflation, which is posing 
dilemmas for policymakers and taking on decidedly political 
overtones.  The tenge remains stable, though the Central Bank 
recently had to draw down reserves by several billion dollars to 
support the currency in the face of significant downward pressure. 
End summary. 
The Financial Crisis: From Middle America to Kazakh Steppe 
-------------------------- ------------------------------- 
2. (SBU) Kazakhstan's banking sector has taken a hit from the 
U.S.-inspired global financial turbulence, but remains stable. 
While Kazakhstan's major banks do have significant exposure to the 
domestic real estate sector, the Chairman of the Financial 
Supervision Agency (FSA), Arman Dunayev, recently told the 
Ambassador that because Kazakhstan does not have a domestic subprime 
mortgage market, the country's only link to the global financial 
crisis is via its banking system's external borrowings.  These 
external borrowings by Kazakhstani banks mushroomed over the past 
two years, attracting substantial notoriety (ref A) and resulting in 
the country's financial system developing a dependence on a 
continuing inflow of liquidity from abroad.  According to most 
informed observers, these borrowings had created an unhealthy 
liquidity glut. 
The Banking Sector: How Painful the Moment of Reckoning? 
----------------------- -------------------------------- 
3. (SBU) The global financial crisis has dried up global liquidity, 
and interrupted Kazakhstani banks' external borrowing binge.  This 
has helped prevent further aggravation of liquidity-driven 
imbalances in Kazakhstan. As Anvar Saidenov, Chairman of the 
National Bank of Kazakhstan (NBK, the country's central bank), 
stated to the Ambassador on August 15, "we actually wanted to slow 
down the credit activity of the banks, even perhaps the economy 
4. (U) With Kazakhstani banks suddenly finding themselves unable to 
continue their binge of borrowing from abroad, some questions have 
arisen about their ability to service their external debts.  For 
example, on October 9 Fitch Ratings downgraded the debt of 
Kazakhstan's three leading commercial banks; Moody's followed suit 
three weeks later with six downgrades.  According to the NBK 
statistics, net external borrowings of Kazakhstani banks were, as of 
September, $23.6 billion.  Debt service payments due by the end of 
year were $3.8 billion.  Nevertheless, key actors in the Kazakhstani 
banking sector have sounded reassuring, indicating that the debt 
service payments are not a substantial burden.  Central Bank 
chairman Saidenov has publicly stated that the banks are "capable of 
handling the situation themselves." 
5. (SBU) In addition, Magzhan Auezov, Managing Director of 
KazKommertsBank, told the DCM on October 3 that most of the 
Kazakhstani banks' external debts are in the form of syndicated 
loans, not bonds.  Thus, Auezov claimed, their terms can more easily 
be renegotiated.  According to Saidenov, the primary risks appear to 
reside in the smaller banks, not the leaders.  On the other hand, 
FSA Chairman Dunayev told the Ambassador, smaller banks did not 
participate in the external borrowing binge.  In any case, the NBK 
and the FSA are not taking any chances.  In order to strengthen the 
banking system's financial footing, the regulators have raised 
reserve requirements.  "Other countries' central banks are adding 
liquidity; we are taking it out," Dunayev said.  He stressed the 
regulators' resolve to do what is needed to avert a deep banking 
sector crisis: "If something happens," he said, "clearly the NBK 
will have to use gold reserves to help our banks to repay their 
Construction Sector Hit, Real Estate Market Cooling 
------------------------ -------------------------- 
6. (SBU) With securities markets woefully underdeveloped, much of 
ASTANA 00003025  002.2 OF 003 
the banking system's excess liquidity had been pouring into the &
#x000A;domestic real estate market, through both mortgage lending and 
construction financing provided by banks.  In turn, the real estate 
sector, particularly in Astana and Almaty, had been showing worrying 
signs of overheating. 
7. (SBU) While the impact of the global crisis on the overall 
Kazakhstani economy has so far been muted, it has hit the real 
estate and construction sectors.  Some Kazakhstani banks have since 
cut back sharply on their mortgage lending, particularly for housing 
developments in the new parts of Astana.  As a result, interest 
rates on (tenge-denominated) mortgages have soared from 14-15% 
before the crisis to 21-22% now.  Reports abound of work on many 
construction sites in Almaty and Astana having been suspended. 
While there are no reports of mass defaults of mortgages, a cooling 
in the real estate market is evident.  Although housing prices in 
Almaty and Astana are still up sharply year-on-year, they currently 
appear to be receding in Almaty and stagnating in Astana. 
When It Rains, It Pours...  Inflation Breaks out 
-------------------------- --------------------- 
8. (SBU) It is not the banking sector, however, but the inflation 
that is currently capturing Kazakhstani headlines.  With monthly 
inflation soaring from 0.7% in August to 4.4% in October (and 
year-on-year inflation rising in the same period from 9.4% to 
15.3%), the outbreak is significant and attracting a lot of 
attention.  The political ramifications of the uptick are magnified 
by a disproportionate rise in bread prices specifically (ref C) and 
food prices in general.  Despite obvious links to rising wheat 
prices on the world market, the growth in bread prices - and food 
prices overall - is taking on increasingly political overtones.  At 
an October 12 conference, President Nazarbayev stated that "somebody 
is trying to destabilize the economic situation in the country." 
This remark comes in the wake of the government's repeated 
pronouncements blaming monopolies, working in tandem with corrupt 
akims, for the spike in inflation. 
9. (SBU) There may, however, be tangible economic roots of the 
rising inflation.  Possible contributors include the effects of the 
mushrooming (pre-August) liquidity glut, fiscal loosening in the 
run-up to the August Parliamentary election, and delayed 
post-election hikes in government-regulated utility tariffs. 
Furthermore, the relative lack of competition in Kazakhstan's 
economy, especially at wholesale level (and particularly in the food 
industry) may be acting as a significant magnifying mechanism for 
external inflationary pressures, a phenomenon quite pronounced in 
the current growth of food prices. 
Save the Tenge 
10. (SBU) During the recent U.S.-inspired economic turbulence, the 
tenge has remained quite stable against the dollar.  (Note: After 
trading in the 123-126 KZT/$ range in August, the tenge has not 
since ventured outside the 120-122 range.  End note.)  This 
stability, however, belies some substantial downward pressure on the 
tenge, which prompted the NBK to undertake an apparently gargantuan 
effort to support the domestic currency.  Speaking to the DCM, 
Auezov attributed recent pressure on the tenge to two causes.  One 
was a panic sell-off due to the very brief stoppage of the inflow of 
foreign currency into Kazakhstan due to a customs shutdown.  (Note: 
The foreign currency portion of customs shutdown (ref D, E) led to a 
brief panic-buying of dollars by the Kazakhstani public during late 
August and early September, but was resolved within days.  End 
note.)  The second reason, said Auezov, is the end, brought about by 
the American financial crisis, of the dollar-to-tenge carry trade. 
According to Auezov, Morgan Stanley had a tenge-denominated position 
worth $1.2 billion, which it quickly unloaded when the troubles in 
the U.S. began.  The NBK, Auezov added, ended up supporting the 
tenge on the open market, "selling $800 million on a single day." 
(Note: official data supports this.  During the August to September 
period, the NBK's gold and foreign reserves fell from $22.0 billion 
to $18.5 billion.  End Note.)  Dunayev told the Ambassador that if 
the NBK had not stepped in to drain the liquidity, "inflation would 
have been even higher." 
11. (SBU) With the National (Oil) Fund still flush with 
petrodollars, and foreign reserves still strong, the National Bank 
of Kazakhstan remains in a firm position to ward off any truly 
serious banking system crisis.  In fact, as noted above, the sudden 
drying up of global liquidity may, in the long term, be good for 
Kazakhstan's financial system, by helping to resolve imbalances 
ASTANA 00003025  003.2 OF 003 
driven by the liquidity glut.  Concurrent rising inflation may, in 
the end, prove to be the more turbulent factor.  If it searches for 
a quick fix to the inflation problem, the government could end up 
introducing measures that have little to do with the economics of 
the phenomenon.  The National Bank's steady hand on the monetary 
policy and resolve to control liquidity may itself be sufficient to 
bring the inflation spike under control.  End comment. 


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