Kazakhstan to Use Oil Wealth to Avert Bank Failures

By Nariman Gizitdinov and Laura Cochrane

Oct. 20 (Bloomberg) -- Kazakhstan's Prime Minister Karim Masimov said he will spend oil revenue to spur growth and prevent any failure by the central Asian nation's banks, which investors rank as the most prone to default in emerging markets.

``The Kazakh government is ready to step in,'' Masimov said in an interview with Bloomberg in the capital Astana. ``The Kazakh banking system with the support of the government and central bank will fulfill all obligations to international investors.''

Kazakhstan has the highest risk of following Iceland toward a financial industry implosion, based on the cost to protect bonds sold by the country's two biggest lenders. Along with Latvia, Kazakhstan's $100 billion oil-led economy is the most vulnerable to the credit crisis because of its reliance on short-term foreign borrowing, RBC Capital Markets said in a report last week.

The government will buy as much as $5 billion of distressed assets from banks in the next two years and will aid growth by spending up to $10 billion from the National Oil Fund on agriculture and development, Masimov said.

``We have our own specific plan to survive without any external support,'' Masimov said. ``I don't think we need support from the International Monetary Fund or overseas.''

`Canary in Coal Mine'

Iceland turned to the IMF after its three biggest lenders failed to secure short-term funding. Ukraine is also lining up loans from the IMF, while Hungary is getting help from the European Central Bank and the IMF to unblock its credit markets.

The nine countries RBC considers the most at risk from the global credit crisis are all in eastern European and the former Soviet Union. Russia's government has pledged more than $200 billion of support for banks and companies.

``Kazakhstan is like the canary in the coal mine,'' said Nick Chamie, head of emerging-market research for RBC in Toronto. ``It has been feeling the effects of the credit crunch for some time and definitely before the Hungarian and Russian banks because of their reliance on short-term external funding.''

Kazakhstan is facing its worst financial crisis after a decade-long boom in which the economy expanded by an average of 10 percent a year, helped by a surge in the price of oil to a record $147 in July from as little as $25 in 2000. The growth enriched the population of 15.3 million, sending house prices soaring 30 percent last year.

Moody's `Negative'

As oil tumbled to $70 a barrel, property prices in the nation's biggest city Almaty have dropped 15 percent from a year ago, according to the national statistics agency. Net income at Kazakhstan's 36 banks fell 47 percent in the first eight months of this year as lenders put aside more money to cover bad loans, the agency said last month. About 36 percent of all bank loans are secured by property, Financial Supervision Agency chief Yelena Bakhmutova said last month.

Kazakhstan's banks are undergoing a ``survival test,'' Moody's Investors Service said today, assigning a negative outlook.

In contrast with Iceland or Ukraine, Kazakhstan has set aside its oil revenue to weather a financial crisis. The country has $49.5 billion of reserves, including $27.6 billion in the National Oil Fund created eight years ago to guard against a drop in crude, according to central bank data on Oct. 3.

The funds mean the government could repay all $13.7 billion of foreign debt due in the second half this year, including $9.3 billion owed by banks, Goldman Sachs Group Inc. said in a report last week. The reserves would also cover the $16.9 billion of debt maturing next year, including $6.9 billion owned by banks, Goldman said, citing National Bank of Kazakhstan data.

Deficit

``The government has enough firepower to support the banking system,'' Goldman economist Anna Zadornova wrote.

Goldman forecast a current account deficit next year and cut its prediction for economic growth to 3.5 percent for 2009 from a previous 5 percent. Prime Minister Masimov said he expects economic growth of between 5 and 6 percent for 2009, and 4 to 5 percent this year.

``One year ago everyone expected the Kazakh banking system would collapse, but I was sure it will survive,'' Masimov said. ``I can be quite sure that Kazakh banks will not have any problems on the international market.''

Default Swaps

The cost to protect bonds of BTA Bank, Kazakhstan's biggest lender, more than doubled in the past month to 3,685 basis points. Credit-default swaps on AO Kazkommertsbank cost 2,800 basis points, according to prices from CMA Datavision. Contracts on Russia's OAO Sberbank, the next riskiest emerging-market lender, trade for a third of the cost at 980 basis points.

Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality. A basis point, or 0.01 percentage point, is equivalent to $1,000 on a contract that protects $10 million of debt.

The cost to protect Kazakhstan's government debt against default more than doubled this month to more than 1,000 basis points, the level for borrowers that investors term ``distressed,'' according to CMA Datavision prices on Bloomberg. Only Ukraine ranks as a bigger risk of the emerging-market governments in Europe.

Kazakhstan's main Kzkak Index of stocks lost more than half its value this year.

National Wellbeing

Masimov said the government will provide $5 billion this week for its new National Wellbeing Fund for development projects. A further $5 billion will be kept ``on hold,'' depending on ``what will happen in international markets,'' he said.

The government will also spend at least $1 billion on the distressed bank assets fund. ``The government is ready to increase the fund capitalization up to $5 billion when needed,'' Masimov said. The economy ministry said in a statement today that the government will release 52 billion tenge ($430 million) for the rescue fund.

The money will buy land used as loan collateral at a discounted price, Masimov said. The purchases may start in seven or 10 days. The first $1 billion will come from the budget, and the rest may come from ``different sources,'' Masimov said, without providing details.

``I don't think we will find foreign investors ready to invest in Kazakhstan at this stage,'' and the market may remain closed ``for years,'' Masimov said. ``That is why our strategy is to get our own sources to resolve our problems.''

To contact the reporter on this story: Nariman Gizitdinov in Almaty, through the Moscow newsroom at ngizitdinov@bloomberg.net