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 KAZAKHSTAN International Business Magazine №1, 2012
 Financial Market: Healthy or Sick?
Financial Market: Healthy or Sick?

Kazakhstan stock market still did not get rid of negative consequences of a crisis Professional participants and experts lay main hopes for market revival on the launching of state program “National IPO”. However the number of analysts suggest that its realisation will effect positively but only in short-term prospect.

Is there a light at the end of the tunnel?

Ways out of the crisis of KASE were discussed by the members of the VII Kazakhstan Financial Forum which company Cbonds held in the middle of March in Almaty. The wide range of questions and problems was raised during the event: the current state of Kazakhstan and international stock markets, forecasts and scenarios of their development this year. And of course, the special place was taken by in the debates about the program “National IPO”.

It should be noted that the reports which were made at the event were "moderately negative", according to event organizers, and from the words of the speakers the clear conclusion could be drawn: the stock market is still in crisis and it is still prematurely to wait for his quick recovery even in the case of conducting of “National IPO”.

Opening the forum Sergei Lyalin, the General Director of Cbonds tried to identify key issues and changes at the Kazakhstan financial market. As the marquee event of last year he mentioned the abolition of the Financial Supervision Agency and the RFCA Agency and the transfer of their authorities to the National Bank. "One can argue hoarse which approach to the stock market regulation is better. But the consequences of combining all the functions of different regulators in the National Bank will be diverse. On the one hand, it means the recognition of the subordinate role of the stock market in relation to the banking system on the official level. On the other hand, it eliminates the perpetual conflict between regulators which is in all countries and which is due to the presence of the separate committee on the securities and National Bank. Therefore, combining of these functions in one agency can remove this conflict".

Mr. Lyalin also called the important topic which is discussed today in the financial community – the National Bank's intention to increase the requirements for the capitalization towards the brokerage firms taking it up to 600 thousand of monthly specified rates. In his judgement with this measure the National Bank strives to improve the reliability and stability of the brokers and not to admit the "companies with a dubious reputation" the market. At the same time this step may lead to the monopolization of the market and its concentration in the hands of small number of large players.

Separately the speaker highlighted the relationship of our country and foreign investors. First of all it was talked about the repeat restructurization of BTA commitments. "Again, it did not affect well on the investment image of Kazakhstan. The investors take the repeat restructurisation extremely negative", – said the expert. 

According to him, the development of urgent commodity market through the ETC system became positive. However, the figures in this segment give little causes for optimism. "There is a kind of development and it is nice and pleasant fact but looking at the tender results, overturns and volumes of open positions, this market is taken more as a kind of playground rather than a serious institution because the trading volumes are very small", – he explained his position.

In conclusion Mr. Lyalin focused on the theme of “National IPO” noting that all the statements of officials still have the declarative nature: "They talk about it for quite a long time, and also that the large number of retail investors will be attracted to buy shares Kazakh companies. But all this is still words, although there are promises that stock floatation of national companies will start this year".

However, he expressed the hope that the IPO of national companies on KASE will breathe fresh impetus to the stock market: to attract new investors and to provide new business for brokers and all those who are involved in the Kazakhstan stock market.

The banking sector is recovering

In turn, the Director of the Research Department "Halyk Finance", Sabit Hakimzhanov expanded on the situation in the banking sector. First of all he recalled that in the past few years banks have practically made no contribution to economic growth of Kazakhstan which was provided at the expense of other industries. At the same time the expert paid attention to the fact that foreign investors are concerned about the ability of government to fulfil their previous long-term commitments. In this regard there are difficulties in attracting foreign companies through the state-private partnership. On his opinion, the banking system should fill this gap: "... that the economy could continue to show growth and in order for it to be balanced the bank lending is necessary which now is directed mostly not to the economy as the credit channel is clogged with troubled loans".

As the positive news Mr. Hakimzhanov called the gradual recovery of floating assets loans, although growth is still uneven. "Until 2007, crediting volumes were increased by all banking institutions. Now the average banks are showing the highest rates. These are SberBank, Eurasian, Kaspi and several other banks of second tier". According to the representative of "Halyk Finance" further lending by these banks may be stalled. "It is not clear by what means the average banks are growing. But, apparently, the growth of potential has been already exhausted. That is, the capital which they had at the moment they are already exhausted and came close to the prudential standards".

The main problem for the Kazakhstan BSL is the presence of large volumes of bad loans which continue restraining the lending. With the growing crisis the proportion of these loans increased, the quality of loan portfolio deteriorated, provisions grew up, and banks bore losses. "Last year this process seemed to slow down while the share of problem loans began to decline. Though this is without taking into account the situation of "BTA Bank" and "Alliance". If to take them into consideration, the figure will be much bigger". However, banks are not in a hurry to write-off the "bad" loans out of the balance and if they did, then subsequently the written-off loans "were returned again".

Separately, Mr. Hakimzhanov focused on evaluating the various proposals to clean up banking institutions from the "bad" loans. As it is known, in addition to establishing the Fund of problem loans by the major bank of the country they assume the forming of specialized organizations to manage low-quality assets by banks themselves. At the same time the speaker was sceptical about the possibility to use of FEC for cleaning of banks from the problem loans, that is, the centralized approach. Such approach may be less effective as it involves the transfer of "bad" loans to the third party, and not all banks are interested in that.

In conclusion, Mr. Hakimzhanov underlined that the banking system is at the beginning of recovery which will largely depend on how the lending rates will be reduced in future. "It's not a voluntary process for one hundred percent. It was in a way stimulated by competition from medium-sized banks that offered lower rates and better terms for borrowers at the market of consumer and corporate lending. And it made the other BSL to lower their rates that became one of the positive aspects which contributed to the improvement of asset quality".

Mild recession awaits for Eurozone

The head of Deutsche Bank Kazakhstan, Ulf Vokurka spoke more about global issues and mainly about the situation in the eurozone. Firstly, he paid attention to the presence of economic growth and low inflation in the U.S. and also Germany as the largest country in the eurozone. On the other hand, in China, "the locomotive of world economy," on the background of strong economic growth the higher inflation is observed.

Commenting on the situation in Kazakhstan, the banker noted that our economy is showing "normal growth although not at the level that was before the crisis". It is noteworthy that the predictions of Deutsche Bank Kazakhstan on GDP growth and inflation significantly differed from the official estimates of our government and National Bank. If the German experts expect to see the economic growth of Kazakhstan at the level of 5.5 %, and inflation – at 6.3 %, the estimates of the Cabinet of Ministers and the National Bank look more optimistic. According to their forecasts, GDP growth will be 6% and the inflation rate – 6–8 % (it does not exclude its reduction to 5.5–6 %).

Returning to the situation in Europe, the speaker noted that in the eurozone "milder and shallower recession" is expected. Nevertheless there are number of problems. First of all, Mr. Vokurka called the necessity for pursuing a policy of "strict consolidation". This is the significant budget cuts in the terms of slight increase in revenue. According to the banker, the index of imports to the eurozone which "places in the area of less than 1 %" indicates to the fact that it is possible to implement this policy. 

Another problem is the shortage of credit resources needed to sustain the economic growth. This trend is typical for all major economies and some developing countries.

Among the major issues that should be solved by the banking system of Europe, Mr. Vokurka called the improvement of quality of their debts or refinancing them on less favourable terms as many banks have reduced the credit ratings. At the same time, the banks face the task of increasing their own funds to be ready to implementation of the requirements of Basel III strengthening the capital of its balance sheet. 

After listing the problems the expert called the number of conditions which allow to resolve difficulties. First, this is the policy pursued by the European Central Bank: "The ECB has twice provided funds for the European banks which allowed them to increase liquidity and refinance the part of their assets restoring its ability to issue new loans". Second, the positive economic growth observed in the U.S. and in the countries of South-East Asia, as well as the growth of domestic consumption in China and the depreciation of the Euro against the dollar which allows to increase its exports to EU countries.

The speaker sees the main threat that this year the eurozone countries need to refinance at more than 830 billion Euros; only 250 billion of this amount accounts for Italy. At this time the problems states of the EU will have to adapt to changing economic conditions and policy of "rigid consolidation". "Obviously not all citizens will welcome peacefully the decisions of government in this regard", – said the banker.

Which listing we do not need

Further, the forum participants stopped on the state program "National IPO” and discussed the question what its implementation may provide for the development of the stock market. It was spoken about this in the speech of the board member of "Halyk Finance» Arnat Abzhanov who began with the analysis of the situation at the stock market. So, for March, 12 this year, the domestic stock market capitalization was $47 billion. The most attractive for investors are still the equity securities of nine big companies included in the first category of shares sector. Totally, there are shares of 68 issuers in the official list of KASE.   

"40 % of the total turnover of shares on the Kazakhstan Stock Exchange accounted for shares of the seven most liquid companies last year. Most of the shares from the official list of KASE is concentrated in the hands of large holders, moreover that the number of issuers with share of stocks in free circulation of 15 % and more is less than one-third, including even those companies which securities are traded on foreign exchanges".

Mr. Abzhanov also reminded that there are two methods of listing on the KASE. The first one is the “real listing” of shares followed by the large-scale IPO or SPO as "Kazakhtelecom" did, and the second one is the “technical listing” assuming the inclusion of shares in the official list of exchange without the subsequent placement amount the wide range of Kazakhstan investors. Usually the latter is used as a supplement to the existing listing on major exchanges. For example, in due time "Kazakhmys" and ENRC did that. The representative of "Halyk Finance" is also sure that the development of the stock market is possible only with the active use by the issuer of the first – real method. This is due to the fact that the technical listing is usually carried out by the companies for the purpose of tax optimization since the entry into the official list of KASE releases the issuers and investors from certain taxes.

Behind all the planet

Speaking about the state program on the primary distribution of national companies shares, Mr. Abzhanov noted that it is very important for the further survival and development of the stock market because now the capitalization of the stock segment is "only 0.1 % of world capitalization". Our country looks very pale against the neighbouring countries also on the ratio of market capitalization to GDP. So, if we do not exceed 25 %, then China reaches 64 %, and Russia – 68 %. As for liquidity, that is the turnover ratio to market capitalization, in China it is 70 %, in Russia – 49 % and in Kazakhstan only 1 %. According to expert, “National IPO” should help to change the status quo.

Referring to the evaluation of the Ministry of Economic Development and Trade, he noted that as a result of the primary distribution of shares amount the people the companies can attract $100–$200 million while distributing among the pension funds – $200–$300 million. It is assumed that the “National IPO” will be attended by up to 180,000 Kazakhstan people, and with the NPF contributors – about 8 million.

However, talking about the “National IPO” as about the panacea for the stock market, Mr. Abzhanov did not forget about the bad experience of our northern neighbour: "In autumn 2010 the Russian government approved the program of state property privatization for 2011–2013. The shares of "SberBank", "Rosneft", VTB and the commercial port of Novorossiysk have been distributed at the market. The distributions of the last two issuers failed. VTB is now trading at 47 %, and the NCP – at 67 % below the offering price".

Despite this fact, the expert believes that taking into account the market external conditions the favourable conditions for the "National IPO” now appeared also in Kazakhstan.

It is time to change the market

Among other most interesting performances the report of the ex-president of KASE Azamat Dzholdasbekov may be noted. In it he proposed the new concept of development of Kazakhstan's stock market urging not to consider the KASE as the “branch of LSE”.

In his opinion, the shares sector is now "at zero level" so "everything should be started again". Moreover, Mr. Dzholdasbekov does not lay much hope on the "National IPO” as he is sure that this is "one-time event".

He believes that the real "driving force" of the stock market may be not only monopolies, commodity and national companies, and even those issuers which shares are traded on the foreign exchanges, as the local medium-sized enterprises. It is necessary to change the whole system of listing, regulation and evaluation, move from quantitative indexes to subjective "expert-ethics" assessments and build the regulation of their base. According to Mr. Dzholdasbekov if this is not done, then it is quite doubtful to wait the progress development from the Kazakhstan Stock Exchange.

However, not all forum participants shared the opinion that the implementation of the program "National IPO will not have the significant positive impact on the market development.

Professional participants even held the voting on the matter. It is noteworthy that the votes "for" and "against" were divided equally.

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Mission Is Possible   Editorial 
Course for Innovations  Blitz Poll 
On Thin Ice  Editorial 
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