The Chairman of the board of management of National Bank of RK answered our questions.
- Anvar Galimulaevich, this question has already become banal, nevertheless, what do you think of the booming growth of banking sector and the connected risks?
- I would like to say that I don’t see this situation very pessimistically. True, the stability of financial sector and economy in general is somewhat pressed, and the risks are present. They are growing in some areas, for example, property market and consumer finance. However, I think that the situation in general is favourable. Because the banks seriously consider the risks and the AFS (Agency of Financial Supervision) tries to react to the situation to the best of its abilities. To my opinion, financial stability doesn’t cause alarm now, however, a plan of actions for an emergency is required.
- What does the financial stability depend the most on – oil prices, government regulation or other factors?
- I think that the financial sector depends on the oil prices, but not as much as export industries of our economy. If the prices for energy resources decrease to the level of 1998 or 1999, the state budget’s income will decrease. While the financial sector due to its higher refinement and because it is an intermediary, depends less on this factor.
I think there is another aspect to take into account. It is regarding the comparative parameters: the ration of assets to GDP and loans to GDP, we haven’t even reached the parameters of Central and Eastern Europe, though we are getting close. Taking into account the size of financial sector relative to the size of the economy of the European countries, especially Western European countries, we can say that our financial structures still have room for growth. Our banks still don’t implement the functions of intermediaries completely. There is still a big unsatisfied demand for loans.
- I haven’t heard of any public discussions of scenarios of actions of National Bank and other government bodies in response to different influences of external factros on our financial system. Are such scenarios at place?
- We are working on them now. I am talking about the memorandum of financial stability, which is developed by the National Bank and other government bodies. The work on this memorandum started at the end of last year, after the report on financial stability was prepared and approved. The work is a little bit delayed because of the long process of approving it with all interested ministries. We don’t know yet how the final form of the memorandum will look like, therefore, it would be incorrect for me to share my ideas about it at the moment.
- Why the work didn’t start earlier? After all, the risks have appeared long ago.
- I wouldn’t say that they appeared long ago. The situation with foreign loans, which drew the society’s attention to the growth of banking industry, arose only during the last two years.
In general, a crisis is always possible. Some of the risks may sharply rise and lead to a difficult situation. Actually, a lot depends on the external environment, where anything might happen, including political changes.
- How would you rate the risks?
- I would give the first place to external risks. Firstly, the economical external risks. The oil prices, which are difficult to predict, are the main part of the risks for Kazakhstan. Secondly, the financial risks. For example, currently there is a tendency of investors running away to higher quality. What does it mean? Currently profitability increases in the countries where Central Banks fight inflation. Investors start to switch their capitals to instruments of these countries. Last week we saw that spreads of instruments, including Kazakhstan’s instruments, on the emerging markets increased. It may lead to outflow of capital from our market. In this case our banks and companies would have access to external sources of financing at a significantly higher price.
- Maybe it is good?
- Maybe it is good. Some banks have already declared that they may reconsider their strategies and decrease external borrowing. However, in general I think the reduction of investors’ interests towards our market is a negative factor. If the tendency continues, it will lead to reconsideration of ratings of our country, companies and financial institutions.
The worst scenario is if the oil prices fall and at the same time investors withdraw from the instruments of emerging markets. But it is unlikely. I don’t think there will be a sharp decrease of oil prices.
- During the crisis of 1998 Kazakhstan’s financial system suffered less than financial systems of other countries. Its underdevelopment and isolation from world capital markets saved it from a harder shock. If such crisis took place now, would it have a greater devastating impact on the system?
- The losses would be higher now. But the crisis wave wouldn’t cover us, because we didn’t and don’t have short-term speculative capital on our stock exchange. Non-residents on the stock exchange mainly invest into notes of the National Bank and securities of the Ministry of Finance, and even this is limited. Of course, in case of a crisis they may withdraw their deposits from our commercial banks. This would be a much greater amount than in 1998, but it wouldn’t be critical for our banks.
Recently we arranged a brain storm together with the government and World Bank. One of American experts there analysed the lessons of the crisis in South-East Asia in 1997-1998. He said that splitting the foreign capital to short-term speculative and long-term parts doesn’t change anything. For example, during the crisis in Malaysia “General Motors” decided to withdraw from the country its dividends, which it accumulated over 10 years. Within several days it withdrew 600 million USD from Malaysian accounts. We see than this wasn’t short-term speculative capital. However, the foreigners wanted to withdraw it. It is hard to foresee such situation.
We asked for the expert’s about our system of indicators that informs us of an upcoming crisis. This system is a part of memorandum on financial stability and concept of managing foreign borrowings. It assesses the possibility of currency of banking crisis taking place. He said that he was sceptical about any system of indicators in general. To his opinion, it is not possible to foresee a crisis. According to him, it has never happened in history. Ex post, people can only analyse the behaviour of indicators and how they signalled the dangers.
We asked him, what was the solution? Is everything so pessimistic? He answered that he can only recommend the regulators to closely study the situation appearing on the financial markets and in the industrial sphere. The experience shows that before the crisis the governments of Malaysia and Thailand had a wrong understanding of the situation, especially on the residential and commercial property markets. The history has many examples, when actions of the regulators provoked, let alone prevented, initiation of a crisis. Thus, the expert advised to analyse the financial market and property market in order to have an adequate understanding of situation.
- If crises cannot be prevented, then maybe it is best to dedicate all efforts to developing actions scenarios for different possible situations?
Yes, I agree with that. If the situation can develop in unpredicted directions, we need to have a large range of actions variations. We need to be ready to anything.
A lot has to be taken into account: legislative basis, budget expenses to particular program of actions, etc. For example, recently we faced a bankruptcy of a pension fund for the first time, and discovered that our legislative basis was not fully ready for this. What is we face a mass bankruptcy? What amounts should be included into the budget to stabilize the market in this case? Should it be the government’s responsibility? All of these questions still don’t have answers.
- Currently there is a problem with finding highly qualified staff for banks and companies. Who does the analytical work in the National Bank?
Last year the department of financial stability was established within the structure of National Bank. Oleg Smolyakov is the head of the department. And the AFS also has its team of analytics.
- Did you invite foreign consultants?
- We didn’t regarding the questions of financial stability. There was one exception – an expert from the European committee Max Watson, he is considered to be highly qualified in this area, and he has participated in several conference din Kazakhstan.
Talking about consultants on macro-economics, National Bank has signed contracts with some professors, well-known scientists, of Oxford University. This year we would like them to help us to develop our monetary and budget policy that would be optimal in the conditions of economic growth. Besides, we already negotiate with them the next stage - research on the influence of state regulation on the financial sector. This topic is quite popular in the EU now. We suggest the consultants to consider what can be the future effect of regulatory actions by the National Bank, AFS and government on the financial market. - What is your opinion on the expansion of our banks abroad and foreign banks to our country?
- I think it is an inevitable process. It is not necessary and not possible to fight against the process. Of course, the expansion has its risks; but in general it is a positive development. It means that the quality of services of our banks is high enough, that our banks are competitive, and that they can fight for a place on the markets of other countries. Diversification of investments and international character of capitals, which were described by Karl Marx, are inevitable.
Expansion of foreign banks to our market is, first of all, connected with Kazakhstan’s joining the WTO. The tendencies on our market in mid-term period will depend on how the joining will be arranged, the effect of the transition period and the effect of foreign banks opening their offices.
- What are the most likely scenarios?
The extreme scenario would be forming the financial system as they are formed in Central and Eastern Europe and Baltic countries, where almost all banks belong to foreigners. For example, in Baltic countries 80 – 90% of banks are Scandinavian. In general, it is not bad the owner to sell his bank if he is offered a good price. I suppose it would be a correct business decision. However, in my opinion (which is formed mostly intuitively), our large banks will not want to be completely sold to foreigners. They will always play an important role on our market. I may be wrong, but it is my subjective opinion.
There are quite large foreign banks in Kazakhstan already. And new serious foreign players will appear in Kazakhstan after it has joined the WTO; they will probably appear in insurance sector and other less developed segments of financial market. Dominating the market will not require them to make large investments, because capitalization of our financial companies is still small and the market segment itself is not big.
- What will be the tendencies in the banking industry?
- I think they will be connected with the range of products, including the consumer finance. Those banks that have complex automated systems (which mostly refers to foreign banks) will have an advantage.
Development of banking services will take place in a complex way. Banks will use the possibility of developing life insurance with connection to pension funds and asset management. Even now private banking is already actively developing. However, this segment is quite narrow, it is only for rich people in Kazakhstan.
- Will there be a further consolidation of banks?
- Probably there will be, because there are medium size banks that may benefit from merging or being acquired by larger financial institutions. I don’t also rule out the possibility of consolidation of two relatively large banks. By the way, I know that the AFS has applications of foreigners for permission to open new banks in Kazakhstan.
- Today all large banks can be divided into two groups. Some of them are very aggressive, like BTA and Alliance. Others are conservative, like Halyk Bank and BCC. If you move into management of a commercial bank, like Mr. Marchenko did, what group would you join? The policy of which group do you prefer?
This is a difficult question. I think that expansion into the countries of the CIS is quite important stage of development for our banks. All of the largest Kazakhstani financial institutions develop in this direction, including Halyk Bank. Presence on the international market as a borrower is also required. The IPO of Halyk, for example, was very successful on the international area. I think I would not be able to be too conservative.