Stock Indices: Fighting All Winds
Summarising the development of the Kazakh stock market in 2007, we note that despite all “fluctuations” the total volume of operations on the Kazakh Stock (KASE), including the special trading floor of the Almaty Regional Financial Centre, grew by 90% to $322.5 billion, or by 85% to 39,505.6 billion tenge (Table 1).
The year 2007 started with warnings made by the former chairman of the US Federal Reserve, Alan Greenspan, in February about a possible recession in the US economy. He said that the US economy had been constantly growing since 2001 and it had started showing up signs of the end of the current economic cycle. Soon after, the Chinese stock market fell by 9% amid expectations of the Chinese government’s measures to limit speculation and tighten requirements for investment activities on stock exchanges. By doing this, the Chinese authorities intended to prevent the overheating of the country’s stock market which grew by 135% in the previous year. As a result, the Shanghai and Shenzhen 300 index fell by 9.2%, while the Shanghai Composite fell by 8.8%. This was the sharpest slump in the past decade and dragged all the main world indices down with it.
However, the biggest shock was the global liquidity squeeze. A report on mortgage repayment delays on the US property market was published as early as in March 2007, while New Century Financial Corporation, the USA’s major mortgage company, went bust in April 2007. However, the full scale of the problem was realised only in summer when the main financial institutions suggested that they would write off mortgage-backed assets.
The shockwaves of this reached Kazakhstan in the second half of 2007, when the problems of the financial and construction sectors which had been accounting for half of GDP growth in previous years started destabilising the situation on the Kazakh stock market (Table 2).
Government Securities Market
Kazakhstan’s total public debt, amassed in 2007 in form of government securities, including municipal bonds and servicing (coupon payments) stood at 1,083 billion tenge in current prices or $9,002.6 million at the exchange rate of 120.3 tenge to the dollar (Table 3). The future payments on Indexed Treasury Bills with a maturity of at least three months were calculated taking into account the consumer price index recorded between October and December 2007 inclusive and on Long-term Savings Treasury Bills with a maturity of over five years and Long-term Treasury Bills with a maturity of over five years – between January and December 2007 inclusive.
In 2007, 47 companies were involved in buying and selling government securities. The share of the 10 most active players on the KASE in Category K was 79.5% of the total volume of the relevant sector of the stock market. These were HSBC Bank Kazakhstan (19%), Halyk Savings Bank of Kazakhstan (18.8%), BTA Bank (formerly TuranAlem Bank) (12%), Kazkommertsbank (8.3%), ATF Bank (7.2%), Alliance Bank (6.1%), Citibank Kazakhstan (3.1%), Zhetisu investment pension company (2.1%), Halyk Bank’s Pension Fund and the State Pension Fund (1.3%).
Primary government securities market. In late 2007, the Ministry of Finance held two auctions to sell Short-term Treasury Bills: the first one was the ministry’s Short-Term Treasury Bills with a maturity of six months of issue No 181 (KZK1KM061816, MKM006_0181; 100 tenge, 12.12.07 – 12.06.08, actual/actual). The point of trade was in the price of securities. It was initially planned to attract 10 billion tenge. The total volume of demand was 36,120.1 million tenge (379.4% of the volume of securities offered). Yield ranged between 8.2999% and 12.0001%, with the average-weighted annual yield of 10.1026%. As a result of the trading, the issuer cut the price of demand at 95.7% (yield of 8.9864%) and satisfied the demand for buying 137,359,833 securities to the tune of 13,184,443,909.42 tenge, which exceeded the target by 37.4%.
The second auction was to sell the Ministry of Finance’s Short-term Treasury Bills with a maturity of nine months of issue No 9 (KZK1KM090096, MKM009_0009; 100 tenge, 26.12.07 – 26.09.08, actual/actual). It was initially targeted to attract 20 billion tenge. The total volume of demand was 68,614.1 million tenge (368.4% of the volume of securities offered). The yield ranged between 8.4952% and 12%, averaging 9.8358%. As a result of the trading, the issuer cut the price of demand at 93.7292% (8.9042%) and satisfied the demand for buying 72,833,333 securities to the tune of 6,828,278,533.75 tenge, (36.4% of the target).
It should be noted that by the end of 2007 the total debt in tenge equivalent fell by 40.5 billion tenge (-3.6%) and by $292.5 million in dollar terms (at the National Bank’s exchange rate) (-3.1%). For comparison, these figures stood at +49.3 billion tenge (+4.6%) and +$405.5 million (+4.6%) in November 2007.
Nevertheless, despite this drop, as of 1 January 2008, the Ministry of Finance’s public debt increased. This may be linked to the adjustment of securities to inflation and an increase in interest rates on the primary government securities market. The reason in both cases was higher inflation and the Ministry of Finance’s certain pliability in placing its instruments, caused by the need to fund the central budget at the end of the year. For example, while public debt decreased by 4,933 billion tenge nominally, the cost of servicing it, which reflects the sum of all the forthcoming coupon payments, grew by 16,546 billion tenge. At the same time, no Long-term Treasury Bills, which could significantly increase servicing, were issued in December.1
1. Please note that these figures are not official and were obtained as a result of analysing information available on databases on the primary government securities market. Information on domestic obligations was checked against data provided by the IRBIS Central Depositary of Securities.Secondary government securities market.
Following a considerable drop in activity in October and November 2007, the secondary government securities market somewhat recovered at the end of 2007. Its volumes grew because of the stable primary market. The bulk of turnover was supported by the sale of the National Bank’s short-term notes by some commercial banks several days ahead of their maturity. Activity was also boosted as greater competition emerged among players that hoped to occupy leading positions in terms of gross volumes of government securities in 2007.
The volume of operations with shares on the KASE, including deals on the Almaty Regional Financial Centre’s special trading floor, totalled $8,924.4 million (1,087.3 billion tenge) in 2007, i.e. it grew by $4,897.8 million (576.3 billion tenge) compared to 2006, or by 120% (110% in tenge terms) (Table 4).
In Categories A, P and H, 69 companies were involved in trade operations with shares on the KASE. The top 10 companies accounted for 83.1% of gross volume of operations with shares – Verny Capital (28.3%), Alliance Capital (25.2%), TuranAlem Securities (7.7%), Visor Capital (6.2%), BCC Invest (4.2%), Almaty Investment Management (3%), Kazkommerts Invest (2.5%), Kazkommerts Securities (2.4%), Resmi Finance and Investment House (2%) and Centras Securities (1.6%).
December, however, did not fulfil expectations – activity fell in all segments of the market. There were registered 1,511 deals to the tune of 47,518.5 million tenge, or $393.7 million at the exchange rate of the date of concluding deals. This figure was 54.1% of the average monthly volume of corporate bonds on the KASE.
As a result, December did not support the optimism brought about by the November results – the volume of deals fell by 84% from the previous month. However, the distribution of the market by deals with shares with highest liquidity shows the trend of adjusting prices of shares of market makers which fell in September 2007 was preserved. It is also important to bear in mind that Kazakh issuers received another pressure from international agents in December. The trend changed amid a new wave of negative assessments of the Kazakh economy’s short-term prospects by international rating agencies. Standard & Poor’s added fuel to the fire of concerns about the Kazakh banking sector by changing the outlook from stable to negative on the ratings of eight banks at once: Kazkommertsbank, TuranAlem Bank, Halyk Savings Bank of Kazakhstan, Alliance Bank, Temirbank, BTA Ipoteka, Nurbank and Eurasian Bank. The grounds for the move were the agency’s concerns over liquidity and the quality of assets, as well as the growing tension about this issue. Fitch Ratings backed S&P and on 17 December changed outlook on Kazakhstan’s long-term issuer default rating to negative. The agency cited serious restrictions on the Kazakh banking sector’s access to the global capital markets since August 2007 as a reason for increasing the risks to the country’s sovereign creditworthiness. Soon afterwards, Fitch reduced outlook on the ratings of ATF Bank, the Development Bank of Kazakhstan, TuranAlem Bank, Kazkommertsbank, Halyk Savings Bank of Kazakhstan, Alliance Bank, CenterCredit Bank and Astana Finance.
Despite expectations there was no sharp drop in the prices of shares of Kazakh issuers on global markets as a reaction to the moves by Fitch and S&P. It is worth mentioning that investors paid more intention to diversifying their issuers. For example, Halyk Bank’s GDR fell by 13.1% on the London Stock Exchange (they fell by 4.3% in November), while those of Kazkommertsbank, on the other hand, grew by 13.7% (-1.9% in November).
The GDR of other Kazakh issuers behaved as normal. The price of KazMunaiGas Exploration and Production’s shares grew by 14.3%, shares of Kazakhmys plc grew by 1.7% after a temporary fall in November, whereas the GDR of Alliance Bank plummeted by 18%.
On the local market, the changes in the prices of the most liquid shares were also moderate. Ordinary shares of Kazkommertsbank went up by 12.2% and KazMunaiGas E&P by 9.1%, but shares of Halyk Bank fell by 7.1%, TuranAlem Bank by 14.9% and Alliance Bank by 3.8%.
The KASE Shares index gained only 9.1 points last year against a 274% growth in 2006, which means the Kazakh stock market could not recover from the global liquidity squeeze.
Table 5 shows the standings of the top 10 liquid shares of companies traded on the KASE in 2007. They accounted for only 45.3% of the total volume of operations with shares on the market. In total, shares with 83 different names were traded on the KASE’s open secondary market.
We can note that the liquidity of ATFBp8 shares grew because of Bank Austria Creditanstalt AG’s buyout of ATF Bank’s preference and ordinary shares and the conversion of preference shares into ordinary ones in September-October 2007. TEBNp shares, which were included in the rating in July 2007, preserved their positions until the end of the year. Moreover, the level of transparency of deals with TEBNp was regarded as high, which makes it possible to consider this paper of Temirbank as very liquid.
Despite the heightened turbulence on the global capital markets, shares of KazMunaiGas E&P, ordinary and preference shares of Kazkommertsbank, ordinary shares of BTA Bank and ordinary shares of Halyk Bank remained in the top 10 most liquid shares. The main reason for this is in a high level of stocks in free circulation. The liquidity of KazMunaiGas E&P’s shares was supported by a positive dynamic in oil prices, whereas the liquidity of shares of major Kazakh banks was backed by investors’ active involvement in operations with them when both prices grew (in early 2007) and fell (in the second half of 2007). By all accounts investors failed to find a decent alternative to shares of banks on the Kazakh stock market last year.
Corporate Bonds Market
The volume of operations with corporate bonds on the KASE and the Almaty Regional Financial Centre’s special trading floor totalled $4,302.5 million in 2007. It grew by $1,286.9 million, or 42.7%, on 2006 (Table 6).
A total of 64 companies were involved in selling and buying corporate bonds on the KASE, and 78.2% of the open corporate bonds market was shared by the top 10 KASE players of Categories A, P and H: TuranAlem Securities (39.9%), Astana Finance Brokerage Company (9.7%), Almaty Investment Management (5%), BCC Invest (4.4%), First Brokerage House (3.8%), Astana Finance (3.65%), Bailyk Asset Management (3.57%), Asia Broker Services (3.3%), Alliance Bank (2.6%) and Resmi Finance and Investment House (2.3%).
Despite the fact that international investment banks announced the first write offs of loan instruments in September-October, the corporate bonds markets failed to recover. In late October, a new wave of the crisis started. First, Merrill Lynch increased the volume of write-offs from $4.5 to $8.4 billion, while Citigroup, having written off $2.7 billion, said that it would write off a further $8-11 billion. These companies, as well as Morgan Stanley and the UBS, received billions of dollars from Asian and Middle Eastern state-run investment funds. Banks have now written off about $100 billion worth loan instruments, above all, subprime mortgage-backed bonds. The OECD, Deutsche Bank and Goldman Sachs estimate that the losses from the crisis to total $300-400 billion and its consequences to be experienced until 2009.
Although Kazakh banks did not invest a single cent in US mortgage bonds, they also faced correction. Kazakh commercial banks, which are very dependent on foreign borrowings, automatically encountered the risks of refinancing. Foreign investors, who treat ratings of emerging markets as an important criterion of risk, rushed to get rid of Kazakh banks’ bonds.
At first glance, an important event took place on the KASE on 19 December 2007. Kazkommertsbank placed its subordinated 10-year bonds to the tune of 7,695 million tenge (about $64 million), which became the first issue of bonds on the local market after August 2007. The yield of these bonds was set at an annual 11.50%, which corresponds to the yield of non-subordinated 10-year eurobonds issued by the bank abroad. However, the placement showed that banks should not expect large-scale demand in this segment. It is most likely that demand would come from major financial groups which will distribute their risks of refinancing among their subsidiary and affiliated structures.
While analysing this data we should bear in mind that in both November and December corrective deals were concluded on the KASE to eliminate a notorious mistake by a Bailyk Asset Management trader as a result of which prices of certain bonds looked unjustifiably low.
In December, the yields of 34 issuers’ bonds nearing their maturity grew, while those of 43 fell. The yields of four bonds had nothing to compare with.
Foreign Exchange Market
The volume of currency operations reached $91,421.8 million on the KASE in 2007, and grew by $49,726.2 million, or 120% on 2006 (Table 7). The average-weighted market exchange rate of the tenge to the dollar calculated on the basis of deals concluded during the main (morning) sessions of the KASE between 1 January and 31 December 2007 stood at, according to IRBIS, 122.92 tenge to the dollar, and on the basis of all deals – 122.5 tenge to the dollar. As a result, the tenge strengthened against the dollar in nominal terms by 5.28% in 2007 (5.06% in 2006).
A total of 26 banks were involved in currency operations on the KASE. The most active players were Kazkommertsbank (16.6%), ABN Amro Bank Kazakhstan (13%), Alliance Bank (11.9%), Nurbank (10.4%), Halyk Bank (9.1%), BTA Bank (6.2%), Citibank Kazakhstan (5.2%), Caspian Bank (4.5%), HSBC Bank Kazakhstan (2.7%) and CenterCredit Bank (2.3%).
Among significant developments was the relatively high volatility of the exchange rate of the dollar in the last few days of December which just managed to stay within the acceptable range. It seems that traders tried to test the support and resistance levels at the end of the year. These tests showed that the chairman of the National Bank’s promises to ensure rate stability on the currency market by the end of 2007 had been fulfilled.
However, taking into account a combination of fundamental factors, most analysts consider the current situation as very unfavourable for the Kazakh tenge; more significantly it is unfavourable for objective reasons.
The following factors weaken the tenge against the dollar:
· Problems in the financial and construction sectors. In connection with this, the growth of Kazakhstan’s GDP, according to some forecasts, may halve in 2008, while higher credit risks may drain local and foreign capital from the country;
· The growing rates of inflation negatively affect economic growth, but, on the other hand, (in line with the purchasing power parity theory) also serve to make the Kazakh national currency cheaper. Annual inflation stood at 18.8% in Kazakhstan in 2007.
· The current account deficit, according to National Bank forecasts, is expected to account for 4-5% of GDP in 2007 compared to 2.3% in 2006. Moreover, the recent dispute over the Kashagan oil field raises concerns about how adequately foreign investment will compensate for the current account deficit in the future.
Anyway, there are still enough factors that are capable of supporting the tenge on the domestic market: among them is the recession in the US economy and the growing prices of most natural resources exported by Kazakhstan.
The volume of repo operations totalled 25,700.6 billion tenge ($209,759.7 million) on the KASE in 2007 and grew by 79% from the previous year (84% in dollar terms) (Table 8).
In total, in addition to the National Bank, 73 companies were involved in repo operations on the KASE. Leading operators were BTA Bank (13.1%), Halyk Bank (10.5%), Kazkommertsbank (7.6%), ATF Bank (6.5%), Alliance Bank (5%), CenterCredit Bank (4.5%), Caspian Bank (4%), Temirbank (3.8%), TuranAlem Securities (3.3%) and Almaty Investment Management (2.9%).
Repo rates had been falling during several months of 2007 because of, specialists believe, a considerable inflow of export earnings and the gradual recovery of commercial banks’ deposit basis, which suffered from the liquidity squeeze. This reduced the need to borrow, which cut the number and volume of repo operations.
As often happens in the run-up to the New Year, players made final account entries. In order to fulfil a target set for issuing loans in 2007, some banks had to borrow “short” money, which explains certain jumps in repo rates in the second half of December.
Disclaimer: the above information should not be considered as an offer or recommendation to sell or purchase securities at KASE. Using this information by any persons to make investment decisions should not entail author’s responsibility for any possible losses or damages resulting from such investment decisions.
By Tatyana Kudryavtseva based on information provided by Irbis
Extractive Sector: Time for Action Editorial Review
Oil Chronicles. Wind of Change Editorial
Kazakhstan’s Agricultural Sector. Grain Ties Sergey Smirnov
Food Market. Not by Bread Alone… Editorial
Kazakhstan's Ratings: Post-mortem Editorial
Stock Market: RFCAsums up Results Chingiz Kanapyanov
The Mergers and Acquisitions Market: M&A Kazakh Style Sergey Frangulidi
Stock Indices: Fighting All Winds Tatyana Kudryavtseva