08ASTANA2351, KAZAKHSTAN: GOVERNMENT MOVES SWIFTLY TO STABILIZE BANKING

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Reference ID Created Released Classification Origin
08ASTANA2351 2008-11-26 02:12 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO9781
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW RUEHROV
RUEHSR RUEHVK RUEHYG
DE RUEHTA #2351/01 3310212
ZNR UUUUU ZZH
O 260212Z NOV 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3963
INFO RUCNCLS/SCA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 0862
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0261
RUEHKO/AMEMBASSY TOKYO 0971
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0429
RUEKJCS/SECDEF WASHDC 0344
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC

UNCLAS SECTION 01 OF 02 ASTANA 002351 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN KZ
 
SUBJECT:  KAZAKHSTAN:  GOVERNMENT MOVES SWIFTLY TO STABILIZE BANKING 
SECTOR (PART 3 OF 3) 
 
REF:  A)  08 ASTANA 2320  B) 08 ASTANA  2338 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  On October 13, 2008, President Nazarbayev 
announced a series of sweeping measures to be enacted by the 
Government of Kazakhstan in response to the global financial crisis. 
 Established to ensure the stability of Kazakhstani financial 
markets, these measures include the accelerated establishment and 
implementation of the Asset Stabilization Fund (ASF), the merger of 
the two largest asset generating and wealth distributing state 
holding companies Samruk and Kazyna, the Law on Financial Stability 
(since adopted), and the government's intention to purchase 25% 
equity stakes of the leading four banks sometime in the coming 
months.  Created in response to the deteriorating quality of bank 
credit portfolios, the ASF (formerly known as the distressed asset 
fund) is likely to be used to purchase collateralized distressed 
mortgages at a 10 percent discount, while shunning assets classified 
as "hopeless" by the national financial regulator.  The total share 
of non-performing loans (NPL) in the banking sector is unclear, with 
estimates ranging from the low single digits to as high as 20 
percent.  As a result of the crisis, local banks have begun to 
revamp their lending practices and bolster their risk management 
strategies.  END SUMMARY. 
 
ASSET STABILIZATION FUND LAUNCH EXPECTED EARLY 2009 
 
3.  (SBU) The government's purchase of shares in major local banks 
follows the creation of the Asset Stabilization Fund in October. 
First announced in July 2007 as a possible Stressed Asset Fund, the 
program was subsequently renamed the Asset Stabilization Fund (ASF). 
 While the injection of capital and acquisition of bank shares 
remain the top priority at this time, the government recognizes a 
growing need to launch this fund in conjunction with broader 
economic stabilization measures.  Both Citibank and the World Bank 
are advising the government on the creation of the fund. 
Unfortunately, official details have yet to be released and could 
not be solicited from Citibank because of confidentiality 
agreements.  However, it is widely expected that the fund will 
purchase distressed assets in the form of loans and bad mortgages, 
including complete construction projects. 
 
RAPID STEPS TOWARD IMPLEMENTATION 
 
4.  (SBU) According to Citibank-Kazakhstan CEO Dan Connelly, the 
government is under considerable pressure to move forward quickly. 
During a November 7 meeting with Prime Minister Masimov, Finance 
Minister Bolat Zhamishev, Samruk-Kazyna Director Kairat Kelimbetov, 
Connelly noted that Zhamishev had a "lot of good questions and 
clearly understood the seriousness of the current crisis."  Most 
expect the Fund to be launched in early 2009, which in the words of 
the Head of Risk Management at ATF/Uni Credit, Nurlan Akshanov, will 
by then "already be necessary." 
 
ONLY PROFITABLE ASSETS TO BE PURCHASED 
 
5.  (SBU) The government is expected to purchase distressed assets 
at a 10 percent discount.  The government is also expected to limit 
its purchases to collateral-based assets from categories 3 and 4 (of 
the 5 categories designated by the Financial Supervision Agency or 
FSA) -- 5 being "hopeless" -- in an effort to ensure that losses 
will be recouped through a later sale of the assets.  Truly "toxic" 
assets (category 5) will not be purchased.  The most recent public 
announcements estimate the fund's capitalization at 52 billion Tenge 
(or approximately $430 million), which Citibank representatives 
assure us is a fluid figure used primarily for planning purposes. 
As with other planned financial measures, the fund will be managed 
by Samruk-Kazyna.  National Bank Deputy Governor Sartbayev expects 
money to be transferred to the fund by the end of the year. 
Overall, the fund is expected to remain in existence for five to 
seven years. 
 
 
ASTANA 00002351  002 OF 002 
 
 
ASSET QUALITY UNCLEAR 
 
6.  (SBU) One of the greatest unknowns within the Kazakhstani 
financial industry remains the true scale of the crisis facing the 
credit market.  This is largely the result of different definitions 
and categories used by banks, regulatory, and monitoring agencies to 
classify and report varying degrees of bad debt.  Without a clear 
picture, it is difficult to assess the efficacy of the government's 
st
abilization efforts.  The numbers and percentages of bad debt 
(also known as impaired assets or non-performing loans) remain 
widely disputed across the industry.  Individually, the top four 
banks each report very small percentages of their loan asset 
portfolios to be non-performing loans (NPL).  This reporting does 
not reflect the severity of the situation as evidenced by the 
government's response. 
 
NON-PERFORMING LOANS EXPECTED TO INCREASE 
 
7.  (SBU) Industry analysts agree that the most rapid growth in NPL 
occurred in the retail sector, or consumer credit accounts, but more 
recently NPL growth has been detected in a wider range of 
investments, including corporate loans and mortgages.  Several top 
Kazakhstani banks shared their percentage of non-performing loans 
with Econoff, including BTA (1.8%, but expected to grow as high as 
3.0%), KazKommertsBank (5.0%), Halyk Bank (7.0%), ATF/UniCredit 
(4.6%), and BCC (2.3%, with expectations that it will rise as high 
as 4.0%).  (NOTE: BTA is slated to receive by far the largest 
injection of capital, yet reports the smallest percentage of NPL. 
END NOTE).  Kazakhstani government officials report somewhat higher 
calculations for the industry as a whole.  According to the FSA, 
approximately 6-7% of the total loan portfolio should be classified 
as NPL.  However, Kazyna General Manager Marat Aitenov reports that 
FSA category 5 ("hopeless") loans are 10% of the banking industry's 
total portfolio.  Regardless of these discrepancies, EBRD Senior 
Banker Ulf Hindstrom is confident that the Kazakhstani government, 
including the FSA, has "significantly underestimated the percentage 
of bad loans," a belief corroborated by Standard and Poor's November 
18 estimate that "loans under stress" comprise 20% of the 
Kazakhstani banking portfolio. 
 
BANKS BRACING FOR CRISIS 
 
8.  (SBU) Local banks have taken urgent measures to recalibrate 
lending practices, shore up risk management strategies, and 
provision existing stressed assets.  Their efforts have been 
facilitated by recent decisions made by the FSA and National Bank of 
Kazakhstan to reduce reserve requirements, which will in turn raise 
available liquidity levels and enable banks to continue lending. 
According to the EBRD, risk management is a relatively new concept 
for most of these banks, where previous levels of economic growth 
across Kazakhstan permitted aggressive growth strategies.  ATF/Uni 
Credit, for example, recently created a 34-member security 
department headed by a former official from the Ministry of Internal 
Affairs to manage bad credit.  Kazakhstani banks are also working to 
shift their loan portfolios away from the more volatile construction 
and real estate industries toward corporate lending and support for 
SMEs.  Representatives at KazKommertsBank (KKB) said that their 
primary challenges in the near term will be to identify credit 
risks, categorize loans, and evaluate survivability. 
 
9.  (SBU) COMMENT:  The government's quick steps to capitalize and 
activate the ASF underscore the growing sense of urgency for action 
felt throughout the Kazakhstani financial sector.  As with crisis 
relief efforts elsewhere, the greatest unknown remains the 
undetermined scope of the crisis.  Only time will tell if the 
government's rapid and direct involvement in the economy will be 
enough to avert disaster.  END COMMENT. 
 
HOAGLAND

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