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Zacks #5 Rank Additions for Wednesday – Zacks Tale of the Tape

Zacks Market Commentaries — Wed, 01 Jul 2009 12:16:10 +0000

Here are the stocks added to the Zacks #5 Rank ("strong sell") List today:

Animal Health International Inc (AHII)
Benihana Inc (BNHNA)
BT Group Plc (BT)
Carnival Plc (CUK)
Cummins Inc (CMI)
Delta Natural Gas Company Inc (DGAS)
Dover Motorsports Inc (DVD)
Eagle Materials Inc (EXP)
Entertainment Properties Trust (EPR)
Esterline Technologies Corp (ESL)
First Advantage Corp (FADV)
First State Bancorp NM (FSNM)
FirstEnergy Corp (FE)
FirstService Corp (FSRV)
Gerber Scientific Inc (GRB)
GlobalOptions Group Inc (GLOI)
HEICO Corp (HEI)
ING Groep NV (ING)
Limco-Piedmont Inc (LIMC)
Lodgian Inc (LGN)
Mack-Cali Realty Corp (CLI)
Nalco Holding Co (NLC)
National Retail Properties Inc (NNN)
Pitney Bowes Inc (PBI)
Prospect Capital Corp (PSEC)
Pulte Homes Inc (PHM)
RBC Bearings Inc (ROLL)
Republic Airways Holdings Inc (RJET)
RRSat Global Communications Network Ltd (RRST)
Sabine Royalty Trust (SBR)
SINA Corp (SINA)
SL Green Realty Corp (SLG)
Snap-on Inc (SNA)
Sterling Construction Company Inc (STRL)
Sun Life Financial Inc (SLF)
SVB Financial Group (SIVB)

No Green Shoots in Germany’s Trade Data (Either)

Claus Vistesen — Tue, 09 Jun 2009 20:12:21 +0000

As Brad Setser points out today, it is difficult to find the alleged green shoots and second derivatives in today's release of Korea's trade data. True, exports in Korea did pick up in April but are now down in May on a monthly basis and on an annual basis they are down a staggering 28%. This picture is repeated in Taiwan (exports down 31% yoy) albeit with the significant difference that exports are up a bit from April thus corroborating the second derivative discourse. According to Setser, Korea is important since Korea's exports have been less affected by the global downturn than that of Japan and, as we shall see, Germany. Moreover, and much contrary to Germany and Japan Korea's trade surplus have actually improved due to the large drop in commodity prices which is really making itself felt in the annual figures since we are closing in on the months where oil peaked in 2008. Finally, and as many others Brad is looking forward to the release of Chinese trade figures which move us forward towards the answer of a couple of important questions. Brad homes in on the first ...

Like everyone else, I am curious to see what China’s May trade data tells us. If China truly is going to lead the global recovery, China needs to import more – and not just import more commodities for its (growing) strategic stockpiles.

I completely agree here. Another interesting question which the data may help shed light on for us may be the extent of the "recovery" itself and thus the evolution in Chinese exports and particularly imports as a proxy for global trade volume.

Meanwhile and if this was Asia's contribution, via trade data, to the ongoing discussion of whether the bottom has been reached and indeed whether the bloodbath in the US treasury market should make us worry about inflation, Germany's trade data did its part to calm down the bulls even if of course we are trailing the speedy Korean data release by one month here. According to the German stats office the total German export volume, in April, was 63.8 billion Euros to match an import volume of 54.4 billion Euros for a positive balance of 9.4 million. To match these numbers a couple of interesting points stand out.

If we look at the annual figures exports were down significantly more (28.7%) than imports (22.9%) which means a narrowing surplus and thus, especially in the case of export dependent Germany, a significant dent in the hopes of recovery. More importantly however from the point of view of the general recovery discourse both exports and imports were down from a the previous month (March) by 4.8% and 5.9% respectively. Together with the message from the Korean trade release, this suggests, as Edward notes, how we have not hit the bottom yet in terms of global trade if of course you see the German data as some kind of proxy here. Indeed, if we look at the figures since Q3/Q4 2008 it is difficult to spot much a second derivative at all. (click pictures for better viewing).

If we look at the evolution of German exports, imports, as well as the balance on quarterly basis the trend is inexorably down. Especially, the plot of the first difference of the trade balance (one year moving average) shows the brick wall Germany has hit with this crisis. Actually, and to put things in perspectives; since Q2-2008 the volume of exports have dropped 4.7% on average each quarter (qoq) compared to a corresponding in imports of 1.9%. In terms of monthly figures the data shows how exports, on average, have dropped by 18.2% each month (yoy) since November 2008. The corresponding number for imports is 11.9%. These two numbers need to be taken with a pinch of salt though since they are neither working day nor seasonally adjusted. The data which tracks changed month-on-month however is. In the same period exports have dropped an average of 4.7% each month compared to with a corresponding number of 3.8% for imports.

All this number salad is then merely to suggest how, when it comes Germany, it seems that we have not yet reached the bottom. This point is hammered down with the recent piece of news from the corporate sector which shows how industrial output declined 1.9 % from the previous month (March).

Germany’s economy may be slow to recover from a record contraction in the first quarter as companies trim jobs and the global slump curbs foreign sales. German exports fell more than economists expected in April and European Central Bank Governing Council member Erkki Liikanen said today that there is “no quick recovery is in sight” for the world economy.

“Today’s numbers are a clear warning against any overhasty optimism,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “At best, the German economy seems to have entered a period of sideways motion.” Output of investment goods such as machines slumped 6.4 percent in April from the previous month, today’s report showed. Production of intermediate goods fell 1 percent and manufacturing output slipped 2.9 percent from March.

Coupled with the first piece of trade data from Q2 suggesting a continuing slide one has to wonder where people are getting all this recovery hype about. Oh wait a minute, I know; it's the US treasury yields stupid!

Well, be it as it may, I am in less of a disagreement than it seems with the bulls. As I have articulated at length recently, there are green shoots to be found and this may have real economic implications. You just need to know where to look.

Russia Heading Towards The Abyss?

Manuel Alvarez-Rivera — Mon, 09 Feb 2009 13:07:00 +0000

blockquote“A significant amount, if not all, of the speculative attacks on the ruble are funded by the central bank itself,” said Vladimir Osakovsky, Moscow-based economist for UniCredit/blockquotepThe underlying dynamics of the current ruble devaluation are provoking more than a little consternation in Russia at the moment. In the forefront of the debate are data from Bank Rossii (the central bank) which show they lent 7.7 trillion rubles ($214 billion) in overnight and seven-day loans (secured with bonds or other collateral) in just 16 trading days last month - this was about double the 4.8 trillion rubles provided via so-called repurchase auctions in December. Over the same period the ruble lost 18 percent against the dollar. The question is, is there a connection here?/ppRussia's banking authorities now certainly seem to think there is and Kommersant reported (Friday) that policy makers planned to reduce bank loans in an attempt to limit bets on the ongoing ruble devaluation. As a result the ruble remained safely within the target band all day Friday, and there was no need for any kind of intervention./pp/ppThe decision follows several days of severe criticism over the way in which Russian banks appeared to be using the loans being made available to them. Oleg Vyugin, former deputy central banker and currently chairman of MDM Bank has suggested that Russia's banks have now accumulated about $40bn in hard currency deposited for their clients on accounts with the central bank and another $40bn on accounts held with foreign banks. /pblockquotePolicy makers lifted the rate on overnight and seven-day loans obtained through the auctions by 1 percentage point to 11 percent this week, the highest since at least November 2007. Banks used “almost all” the money from loan auctions to bet against the ruble, Natalia Orlova chief economist at Alfa, Russia’s largest non-government bank, said. Policy makers “have basically fueled the speculation on the ruble themselves.....The market is intent on testing the central bank’s ability to spend reserves and they’re going to really have to tighten liquidity, or something, if they want to have a hope against that.” /blockquote!--more--br /br /blockquote“If they really wanted to stop speculation, they have to raise the rates significantly, say to 20 or 30 percent, for a short period of time,” said Evgeny Gavrilenkov, chief economist at Moscow-based brokerage Troika Dialog. “One day they have to say: Give me my money back, no more repo is available.” “They have to raise interest rates if they want to stop speculation.....But there is still a lot of concern among the authorities that the banking sector might collapse.”/blockquotebr /br /According a href="http://www.bloomberg.com/apps/news?pid=20601095amp;sid=aqpJfhFF6fZ0amp;refer=east_europe"to Bloomberg/a, Russia's banks bid for 505 billion rubles in repo auctions on Thursday, more than the 402 billion rubles actually lent. Banks also requested 139 billion rubles in an auction of unsecured loans on 3 February, about six times the 23.5 billion rubles provided. The possibility of obtaining such loans was opened up to over 100 Russian banks in November as part of a plan to boost liquidity amid the seizure in global credit markets. The extra funding has helped lower the average interest rate banks charge each other for overnight loans, known as the MosPrime rate, to 10.83 percent on Wednesday from a record 25.17 percent on Jan. 27.br /blockquoteBank Rossii may send representatives to individual banks to check on their foreign-currency holdings, said Stanislav Ponomarenko, chief economist in Moscow at ING Groep NV. President Dmitry Medvedev told the Federal Security Service, Russia’s spy agency, to monitor the allocation of state funds on Jan. 29, saying it is “doubly criminal” for investors to get rich off the crisis./blockquotepbr /strongVTB GDP Indicator Shows Severe Contraction/strongbr //ppIn any event, while a lot of people in the Russian establishment seem busy trying to decide which side they are batting for in all this, a Russian economy which is basically being starved of liquidity is now spirally downwards and downwards. The most recent piece of evidence for this comes from the latest reading on VTB’s Russian GDP Indicator which showed that economic output contracted at a year on year rate of 4 percent in January, down from December’s 1.1 percent decline, and November's 2.1 percent expansion.br /br //ppa href="http://2.bp.blogspot.com/_ngczZkrw340/SYrQqqST3oI/AAAAAAAAMko/mdVbzUd4Lmo/s1600-h/russia+gdp2.png"img id="BLOGGER_PHOTO_ID_5299277342878981762" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SYrQqqST3oI/AAAAAAAAMko/mdVbzUd4Lmo/s400/russia+gdp2.png" border="0" //abr /br /According to Russian economy Ministry estimates the economy will contract by only 0.2 percent this year after expanding 5.6 percent in 2008, so this estimate now seems hopelessly out of date. If we look at the monthly contraction rate as a reflection of the current quarter on quarter contraction, we find a rate of minus 1.6%, which means that the present rate is something like a 6.5% annualised shrinkage rate. At present this is stationary and not accelerating, but it is quite strong, especially for an economy which only six months ago was expanding at a 6.5% annualised rate.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SYrQX0URIrI/AAAAAAAAMkg/pPq0d0ZpbNY/s1600-h/russia+GDP.png"img id="BLOGGER_PHOTO_ID_5299277019154031282" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 245px; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SYrQX0URIrI/AAAAAAAAMkg/pPq0d0ZpbNY/s400/russia+GDP.png" border="0" //a /pbr /br /pstrongServices Contract But Less Strongly Than Manufacturingbr //strongbr /Russia's services industries are still not contracting as fast as the manufacturing sector (34.4), but with the Russian economy shedding 800,000 jobs in December the outlook for improvement is not exactly bright. The PMI reading was little changed - and close to December's all-time low rising to 36.8 in January from 36.4 the previous month. Since a reading over 50 indicates expansion, and below 50 a contraction, this is still a pretty hefty rate of shrinkage. /pa href="http://2.bp.blogspot.com/_ngczZkrw340/SYrQ5M1tiwI/AAAAAAAAMkw/OVzMDbtLzZg/s1600-h/russia+services+PMI.png"img id="BLOGGER_PHOTO_ID_5299277592672439042" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 243px; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SYrQ5M1tiwI/AAAAAAAAMkw/OVzMDbtLzZg/s400/russia+services+PMI.png" border="0" //abr /br /Meantime retail sales grew at the slowest annual pace in nine years in December while disposable incomes fell 11.6 percent.br /br /br /blockquote“Business activity and incoming new business contracted further to record lows due to still weak demand,” said Svetlana Aslanova, senior corporate analyst at VTB Capital, in the report. “Low levels of workloads have forced companies to cut costs” resulting in jobs cuts, she added.br //blockquotebr /pbr /strongNew Policies From The Administration?/strong/ppWith declining reserves in the background, and oil prices which may well not rebound very much this year to concentrate their minds, the Russia adminstration indicated on Wednesday that it was about to make a significant change in the policies it is deploying to fight the financial crisis. The move basically involves switching from bailing out individual companies to attempting to directly support the economy through the banking sector. At the same time Moscow is planning large budget cuts in an attempt to limit the fiscal deficit since letting it run too high threatens to eat up Reserve Fund resources far too quickly if oil prices remain low for any length of time. The general impression is that the administration has now lost hope it can avoid the crisis simply by increasing public spending and is instead digging in deep in an attempt to endure what might turn out to be a rather prolonged recession.br /br /The policy change was announced by Igor Shuvalov, Russia's first deputy prime minister, who stressed the government was deliberately choosing to allow gross domestic product growth to fall to zero or below in 2009 to stabilise the economy and maintain foreign exchange reserves. He was thus explicitly rejecting the advice of those economists who had suggested using the reserves to finance a budget deficit of 10 per cent of GDP to promote growth. Of course the risk here is that this will produce a much stronger GDP contraction with unknown social consequences./ppShuvalov also indicated the government would invest “several percentage points of GDP” in strengthening the banking sector, covering “possible future losses” and supervising a consolidation plan that would see the number of banks cut from 1,100 to 500. Alexei Kudrin, the finance minister, confirmed during a visit to London that the state was preparing to inject $40bn (€31bn, £28bn) capital into banks provided that the money was channelled into the real economy. This would follow last year’s Rbs960bn package of subordinated loans.br /br /Shuvalov indicated some key industrial companies would continue to get priority, headed by military enterprises, Gazprom, the gas monopoly, electricity groups and the state railways. This is a far more tightly focused target than the previously announced list of 295 industrial companies deemed worthy of financial support that included oligarch-led groups such as Rusal, the aluminium company, and Norilsk Nickel, the metal combine. Shuvalov suggested that the state should not have lent $4.5bn to Rusal, Oleg Deripaska’s aluminium group, on the security of its 25 per cent stake in Norilsk Nickel, the metals company, when it was clear these shares were worth only $1.5bn. /ppIn line with the change in policy Vladimir Putin gave the go ahead on Thursday for a second wave of bank bail-outs to extend up to Rbs1,000bn ($28b) in order to refinance the banking sector with new capital and subordinated debt in an effort to transfer the burden for bailing out companies on to commercial banks. Of the three big state-controlled banks, VTB is to receive Rbs200bn in new capital, state-owned VEB is to receive Rbs100bn in capital and Rbs100bn in subordinated debt, and Sberbank, the huge savings bank, may receive funding in the region of Rbs500bn./ppThe moves will increase the state’s stakes in these three banks, boosting its role in the Russian economy. The state’s stake in the three banks are Sberbank 61 per cent, VTB 77.5 per cent and 100 per cent VEB. Vladimir Putin said Moscow could also inject up to 100bn roubles in subordinated loans – Tier 2 capital under international banking rules – into private banks but said the government would not seek stakes in return.br //pblockquoteAndrei Sharonov, a former deputy economy minister, who now works asbr /managing director of Troika Dialog, the Moscow investment bank, said the secondbr /bail-out of the banking system was part of an effort to switch the governmentbr /anti-crisis programme to the banking system instead of bailing out individualbr /companies, which must repay some $140bn in foreign debts this year.br //blockquotep/pblockquoteDanske Bank A/S, which ranks itself among the five biggest traders of the rublebr /through Finnish subsidiary Sampo Bank Plc, said yesterday the ruble will bebr /allowed to trade freely “within weeks,” because pressure on the currency won’tbr /abate after the decline in oil prices, according to Lars Christensen, Danske’sbr /head of emerging -markets strategy. Urals crude, Russia’s chief export blend,br /has fallen 70 percent to $43.01 a barrel since reaching a record in July, belowbr /the $70 average required to balance the government’s 2009 budget. Energybr /accounts for more than 70 percent of Russia’s exports./blockquote

The Ruble Fall Continues As Unemployment Soars

Edward Hugh — Sun, 01 Feb 2009 07:32:00 +0000

Russia's current woes can be readily summed up in just one single variable - the value of the ruble - and this value, as we all know, is falling. Almost uncontrollably so.br /br /blockquoteThe bank’s target will be “very quickly” breached without more intervention, said Gaelle Blanchard of Societe Generale SA in London. “Right now the market is convinced it wants to see the ruble lower,” Blanchard said. “As long as the central bank gives these targets, then speculators are going to have something to aim for.”br /br //blockquoteblockquote“The market is testing whether the authorities see this band as something permanent or something that will move,” said Lars Rassmussen, an emerging markets analyst at Danske Bank A/S. “Our view is that they’ll move it because it’s not worth wasting the reserves for a band that is obviously not wide enough.”/blockquoteblockquoteFirst Deputy Prime Minister Igor Shuvalov expressed regret that the general population failed to fully understand the Central Bank’s policy on the ruble’s exchange rate against the dollar/euro basket. The government did let the ruble depreciate, but it did so gradually, providing plenty of time for people to decide which currency to keep their savings in. /blockquote br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SYW5pJ24U5I/AAAAAAAAMe8/T2w5hE6yTnY/s1600-h/ruble.png"img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 236px;" src="http://4.bp.blogspot.com/_ngczZkrw340/SYW5pJ24U5I/AAAAAAAAMe8/T2w5hE6yTnY/s400/ruble.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5297844653343134610" //abr /br /br /In fact the ruble fell sharply again last Friday, and was on the brink of breaching the target trading band, yet one more time, following its biggest monthly depreciation in more than a decade. The ruble was down at one point by as much as 1.4 percent on the day (to 35.59 per dollar), 1.1 percent away from breaking the 36 per dollar limit. The Russian central bank has now expanded its trading range 20 times since mid-November in a series of attempts to defend the currency. These continuing attempts to hold a line have lead the central bank to use up more than a third of its foreign-currency reserves since last August, a period in which the ruble has fallen some 34 percent slide against the dollar.br /br /The ruble has now depreciated by 20 percent since the start of the year - making January already the worst month for the currency since 1998. And there is obviously more to come, with the government now expecting a decline to 36 per dollar following the latest widening in the trading band, according to First Deputy Prime Minister Igor Shuvalov speaking in the State Duma last week. This "managed devaluation" is seen as an attempt to avoid a reapeat of what happened back in 1998, when the ruble fell by as much as 29 percent in a single day. Yet the currency has now lost over 30% against the dollar (and weakened substantially against the euro) since last summer and all this spells disaster for domestic banks and industrial companies, whose debt is denominated in dollars and euros but who depended on rouble-denominated revenues.br /br /One of the principal problems facing those banks and companies who have this mismatch if that they have insufficient foreign exchange liquidity, while other parts of the banking and corporate sector are better positioned. That is the aggregate external position understates the extent of the problem, since the lack of internal confidence makes it hard for those who are under severe stress to find the appropriate lenders. In part as a an attempt at a solution to this problem state owned investment bank Vnesheconombank (VEB) is preparing to issue foreign-currency bonds to be placed among Russian banks with excess of foreign currency and then redistribute the currency raised to those in need of foreign currency liquidity. During the last quarter of 2008 the net increase in foreign currency assets in the corporate sector was over $100 bln. According to the central bank external corporate debt redemptions totaling $120 bln are anticpated during 2009, which indicates a shortfall of only $20 billion, yet according to Interfax the total volume of applications for fx support to VEB from Russian companies is $80 bln. Which suggests that a sizeable chunk of the $100 bln accumulated by Russian corporates at the end of last year was not intended for foreign-currency debt redemptions but was instead a means a protecting free liquidity from falling in value. That is they converted their liquidity into USD and Euro to avoid losses (or make gains) from the devaluation.br /br /br /strongInflation Always Carries A Price/strongbr /br /The root of Russia's most recent problems is very evidently all that excess inflation which Russia has seen over the last 18 months (if it hadn't been for the inflation there would have been no devaluation, and hence no issue with forex loans), inflation which has taken badly needed competitiveness from Russia's manufacturing industry at a time when the oil and commodity sectors are in the grips of a severe price slump (which means their contribution to the economy is greatly reduced).br /br /Obviously Russia's situation doesn't make for any easy answers, and even devaluation brings with it the problem of the attendant inflationary uptick from imported goods. Russia's month on month inflation is expected to reach 2.4 percent in January 2009, according to the latest estimates from the Russian Federal State Statistics Service (Rosstat), and the Economy Ministry currently estimates Russia's whole year inflation could be as high as 13 percent in 2009. In fact the annual rate for last December was 13.3% (see chart below), so they seem to anticipate very little change in the situation. In fact they may be unduly pessimistic here, since they are almost certainly underestimating the force of Russia's current economic contraction, and the collapse in internal demand may well bring Russia's inflation down more rapidly than they are expecting.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SYVcvy7mmtI/AAAAAAAAMeU/sgjSJ5NCwdc/s1600-h/russia+CPI.png"img id="BLOGGER_PHOTO_ID_5297742512866630354" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 237px; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SYVcvy7mmtI/AAAAAAAAMeU/sgjSJ5NCwdc/s400/russia+CPI.png" border="0" //abr /br /br /strongMonetary Tightening In The Face Of An Economic Slump/strongbr /br /Basically the Russian economy is currently suffering the effects of a long term policy of trying to control the currency value at the same time as being "soft" on inflation. This approach evidently hasn't worked out, and it is to be hoped that some lessons for the future may have been learned, but the sorry reality is that those currently responsible for managing Russia's economy are left with only hard policy options at this point, if they wish to avoid another default. Basically, and on top of all the rest, the economy has two added problems (apart, that is, from the drop in oil prices, the internal credit crunch and the slump in domestic demand): the high inflation, and the capital exit.br /br /br /Russia's reserves are disappearing for a whole variety of reasons at this point. First there are foreign investors who are simply pulling out - investors have removed about $290 billion from Russia sincethe start of August, according to the latest estimates from BNP Paribas. Secondly the Russia central bank has been using reserves to defend the currency. According to the Central Bank last week, Russia's foreign exchange and gold reserves dropped by nearly $10 billion from $396.2bn to $386.5bn in the week to 23 January.Citigroup calculate that the bulk of that fall was the by-product of a strong negative revaluation effect - which may have exceeded $8 billion - and the strengthening of USD vs EUR and GBP probably subtracted $5.5bn and $3.7bn, respectively, from the total in USD. Nonetheless Russia has spent very large quantities of foreign exchange on supporting the ruble since August . According to Kommerant reports Bank Rossii told Russian bankers in a meeting in the middle of the month that their “managed devaluation” of the ruble was over, but as we can see, this is far from being the case. Nikolai Kashcheev, head of economic research at Moscow-based MDM bank, Russia may abandon the ruble's dollar-euro trading band completely and allow the currency to trade freely, with the central bank only intervening to avert serious economic shocks using a so-called “dirty float” mechanism.br /blockquote“A dirty float would look like it was a free market but the central bank would still have a measure of control,” said Kashcheev, who forecast the ruble may fall 5.9 percent against the dollar if the central bank made the switch this week. “It would be a preferable outcome to the devaluation because what they’re doing at the moment is costing too much in reserves.” /blockquotebr /br /The central bank sold $3.2 billion last Friday alone, and $800 million Thursday, according to MDM Bank estimates. The bank appears to have stayed out of the market between January 23 and 27, the first three days after widening its exchange-rate band.br /br /Other demands on foreign exchange comes from Russian corporates who need to pay off foreign exchange debt, or simply protect their ruble liquidity from the devaluation fall, and from individuals and households who wish to do the same.br /br /As a result of the reserve and inflation pressures Russia’s central bank has little alternative but to maintain a relatively tight monetary stance, and indeed the bank raised two key interest rates for the third time since the start of November last week, with the repo rate for one-day and seven-day loans being raised to 11 from 10 percent. Now I say "relatively tight", since obviously with CPI inflation currently running at over 13%, even 11% interest rates are negative in Russia (by around 2%), and thus Russian policy rates could be considered somewhat accommodative (though not as accommodative as would be desireable given the strength of the hit the economy just took). At the end of the day terms like "tight" and "accomodative" are relative terms, and it all depends what you are dealing with.br /blockquoteThe Central Bank does not rule out the possibility of a new wave of the crisis erupting in the banking sector, the bank's Chairman Sergei Ignatyev told the Russian State Duma on Friday. He noted that although such a risk was unlikely in the near term, it was still fairly possible in the foreseeable future. The new wave of crisis may be brought about by a rise in loan defaults, Ignatyev explained. The Central Bank is holding meetings with bankers and keeping a watchful eye on the situation, the official said, adding that the bank was ready for any new developments. He also noted that an increase in certain banks' capitalization might prove necessary./blockquotepRussian media are also reporting that the government anti-crisis committee (which is headed by Deputy Prime Minister Shuvalov) is putting together a rescue plan for carmaker OAO GAZ. If confirmed the move that would mark the first custom built financial rescue of an individual company by the government during the current economic crisis. OAO GAZ, which is based in Nizhny Novgorod, may need $1.6 billion in state funds to continue operating. Shuvalov has confirmed that the government plans to offer substantial support to Russian companies. “The list of such companies will be expanded to 2,000,” he said, noting that it would include both companies involved in the technical modernization of the national economy and those in a difficult financial situation. “To save all companies is impossible and unnecessary"./ppAnother company in difficulties is United Co. Rusal, who are set to sell shares in a private placement as they seek to refinance about $16.3 billion of debt, according to billionaire shareholder and company Chairman Viktor Vekselberg speaking in Davos. The Russian company owes $7 billion to foreign banks, about $6.5 billion to domestic lenders and about $2.8 billion to Mikhail Prokhorov’s Onexim Group. Rusal is in “active” talks with creditors. Rusal, which is Russia’s largest aluminum company, will cut output by as much as 10 percent and freeze investment for about three years. Aluminium fell to a five- year low this month, and profit is projected to slump 88 percent to $476 million this year, according to an estimate by ING Groep NV. Aluminum needs to trade at $1,700 a metric ton for Rusal to be able to service its debt and pursue new projects, according to Vekselberg - aluminum for delivery three months forward was 1.2 percent lower at $1,350 a ton as of 12:18 p.m. on Friday on the London Metal Exchange. Rusal was forced to seek a $4.5 billion bailout from state-owned Vnesheconombank in October to refinance loans used to buy 25 percent of OAO Norilsk Nickel, Russia’s biggest metals and mining company.br /br /So far Russia’s indebted companies have been bailed out by the government, but this year they are due to repay an additional US$117bn to foreign creditors. With opportunities to roll over existing debt limited, and the government’s reserves down by US$200bn since August, the chances of continuing rescues by the federal authorities appear greatly reduced. According to the latest central bank data, some US$117bn of debt needs to be repaid this year, with US$52bn owed by banks and US$62bn by corporations. Debt restructuring looms on the horizon.br /br /strongUnemployment Surges/strong/ppEvidently the crunch in the financial economy - Russia's base money shrank dramatically (from 4283 bln rub to 3896 bln rub, that's not far short of 10% in a month) between 29 December and 26 January - is having a serious impact on the real economy, and nowhere is that clearer than in the unemployment numbers. As could have been expected Russia’s unemployment rate rose sharply in December (up to 7.7 percent from 6.6 percent in November), its highest level since November 2005, as industrial production shrank the most in ten years. The total number of unemployed reached 5.8 million people, as compared with 5 million in November.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SYWHO7nZpbI/AAAAAAAAMec/Md0sL4-79w0/s1600-h/russia+unemploy.png"img id="BLOGGER_PHOTO_ID_5297789227262125490" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 202px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SYWHO7nZpbI/AAAAAAAAMec/Md0sL4-79w0/s400/russia+unemploy.png" border="0" //abr /br /What is most notable is the sharpness of this rise. Alongside the rise in umployment wages have started to fall, and the average monthly wage fell an annual 4.6 percent in December to 17,112 rubles ($517.85), the first contraction since October 1999 when they fell 2.2 percent. Real disposable income fell 11.6 percent, the biggest contraction since August 1999, according to Rostat. So this is how one part of the mechanism works basically. The oil price drops, the ruble devalues, fx loans become unsustainable, new funding dries up, and then the real economy sinks like a stone, and as the unemployment goes up, household and investment demand go down, and economic activity heads on a downward spiral.br /br /strongGDP Growth Outlook/strong/pblockquotebr /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SYWNXTAYrzI/AAAAAAAAMek/OiyxOS_E97w/s1600-h/russia+GDP.png"img id="BLOGGER_PHOTO_ID_5297795968049655602" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 206px; TEXT-ALIGN: center" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SYWNXTAYrzI/AAAAAAAAMek/OiyxOS_E97w/s400/russia+GDP.png" border="0" //abr /br /First Deputy Prime Minister Igor Shuvalov told the State Duma today. “The crisis will continue for three years, of which 2009 will be the most difficult,” /blockquotepIf we now turn to economic forecasts for 2009, Economy Minister Alexei Kudrin said last week that Russia's 2009 GDP growth would be close to zero - a figure which was revised down from the Economy Ministry's earlier 2 percent estimate. blockquote“We must be prepared for further economic decline and a conservative tax and budget policy. Yet we will implement our main programs involving the social protection of the population. The reserves we have built up allow us to be up to that task,” Kudrin stressed. /blockquotepCurrent government estimates also project capital flight to be between $100 billion and $110 billion in 2009, while budget revenue will be far below the planned RUB 10.9 billion (approx. $307.9bn). Kudrin's present estimate is RUB 6.5 trillion (approx. $183.6bn), with oil exports expected to generate the bulk of the revenue. He says the federal budget is expected to decline by 40 percent, from a projected $300 billion [10.9 trillion rubles] to about $185 billion [6.5 billion rubles]. Russia’s current budget is based on an average oil price of $70 a barrel, even though Urals crude, the country’s chief export blend, has slumped 69 percent from a July record to $43.72 a barrel. As a result Prime Minister Vladimir Putin has told the Finance Ministry to recalculate the budget, with the Economy Ministry now forecasting oil to trade at an average $41/pblockquote.“These are the real challenges we face for our economy and the budget system,” Shuvalov said. “If we don’t change our budget targets, and simply replace this lost revenue with money from the reserve funds, the budget deficit will be 6.1 percent of GDP.”/blockquotepKudrin is suggesting that Russia will probably spend the bulk of its 7.317 trillion ruble oil-fund reserves to protect the budget, some, “but not all,”. The economic crisis is likely to “peak” this year, and tax revenue may slide by 1 trillion rubles, he added. But Elina Ribakova, Chief Economist at Citibank Russia takes a different view:/p blockquote“They're planning a large fiscal deficit. Kudrin was mentioning six per cent and our estimate is we could reach ten per cent of GDP, which is most of the reserve fund. So under that scenario yes, we could easily run out of money this year. But I hope that by prudent macroeconomic preemptive policies, we'll not allow that to happen.” /blockquotepRussia's Reserve Fund now stands at 4.7 trillion rubles ($142.5 billion) and the National Wealth Fund at 2.6 trillion rubles ($79 billion). On February 1 2008 the Finance Ministry divided the former Stabilization Fund into the Reserve Fund, which is intended to cushion the federal budget from a plunge in oil prices, and the National Wealth Fund, designed to help Russia carry out pension reforms. /pblockquoteFirst Deputy Prime Minister Igor Shuvalov stated that the global financial crisis is expected to last three years, He confirmed the appropriateness of the government’s reserve strategy, noting that the Finance Ministry was under pressure to start using the reserves several months ago. The crisis could be even more severe than was originally thought, he warned. “We are considering a scenario which is already tough enough, but it could get even tougher, with federal and regional budget revenues falling more sharply than we are estimating,” Shuvalov explained./blockquotepUnless the oil price recovers soon, Russia's current-account surplus will turn into deficit during 2009 (the Economist Intelligence Unit forecasts that it will equal 4% of GDP), meaning that the country would be forced to subsidise vital imports, including food, out of its already strained dollar holdings. Even if an outright default is likely to be avoided, some debt restructuring moves involving the bulk of Russian debt now seem more or less unavoidable. /ppa href="http://4.bp.blogspot.com/_ngczZkrw340/SYWNeOkgP7I/AAAAAAAAMes/6dEXheI5m44/s1600-h/russia+CA+surplus.png"img id="BLOGGER_PHOTO_ID_5297796087118053298" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 203px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SYWNeOkgP7I/AAAAAAAAMes/6dEXheI5m44/s400/russia+CA+surplus.png" border="0" //a As for the outlook for Russian GDP, Kudrin's forecast seems somewhat on the optimistic side, and it is interesting to note that Citgroup have now revised to a 3% contraction in 2009 followed by growth of 1.7% in 2010. They argue (and I agree) that the key change in 2009 GDP is likely to come on the domestic consumption side. Private consumption, which accounts for about 80% of total consumption, now looks set to contract significantly (Citigroup forecast 4.6%), even if the government keeps its originally planned level of current spending. /ppAt the same time investment will also contract (Citigroup suggest by 10%) owing to reduced access to credit and further possible cuts in government capital spending (which accounts for about 10% of total investment growth). The government capital injections (an additional US$40 billion, according to Finance Minister Kudrin, Bloomberg, 22 January) is more liekly to go towards covering bank non performing loan losses rather than supporting new credit. /ppEven more worryingly Citigroup forecast a 10% contraction in new credit. Furthermore, they argue that the government may well have to cut capital spending owing to the need to accommodate increases in social spending and support for the regional governments. As a result of falling income and investment spending imports will fall (perhaps by 20% in dollar terms), this will be positive for the current account deficit (and to some extent for GDP. A 3% CA defeicit thus seems reasonable assuming no rebound in oil prices./ppSo, not a rosy picture. Next stop some more real economy data next week, and the manufacturing and services PMIs./p

Despite The “Sudden Stop” Kazakhstan Won’t Be Calling On The IMF For Help

Edward Hugh — Tue, 21 Oct 2008 10:17:00 +0000

by Edward Hugh: Barcelona

"The Kazakh government is ready to step in,'' Kazakhstan's Prime Minister Karim Masimov said this morning in a telephone interview with Bloomberg "The Kazakh banking system with the support of the government and central bank will fulfill all obligations to international investors.....We have our own specific plan to survive without any external support....I don't think we need support from the International Monetary Fund or overseas.''

Well that is good news, so at least we know that one of the CIS and CEE economies won't be looking to the IMF for bail-out support in this crisis which is presently growing by the day. So Kazakstan, that country which is reputedly host to reserves of approximately 95% of the elements in the periodic table, with a population of around 15 million housed on a surface area greater than the whole of Western Europe, is going to be able to look after itself. But hang on a minute, just where is Kazakhstan, and just what have they been getting up to over there, and why the hell should I take Karim Masimov's word for it, when just about all the other Iceland Look-alike show contestants seem to be saying the same? After all, didn't those extermely bright and able young people over at RBC Capital Markets in Toronto say in a report only last week that, along with Latvia, the country's $100 billion oil-led economy is among the most vulnerable to the present global credit crisis and the skid-row economic trajectories that go with it simply because of its excessive reliance on short-term foreign borrowing. And isn't it the case that the cost of protecting Kazakhstan government debt against default has more than doubled this month - to over 1,000 basis points (or 10%), the level for borrowers that investors term ``distressed,'' according to CMA Datavision credit-default swap prices. Only Ukraine, which as we know is already seeking IMF support, is classified as being a bigger risk among European emerging-market governments. Surely all those highly dedicated, bright, and extremely able young people who are doing all that trading know what they are about, don't they?

Kazakhstan The Country

Kazakhstan, officially known as the Republic of Kazakhstan, could with some accuracy be described as "no mans land" since it actually lies between two worlds, straddling as it does both Central Asia and Europe. It could also be described as a form of no-mans land in another sense, since a large part of its historic population has been nomadic, and rural, and up to very recently the majority of the countries urban population have been migrants who have arrived from "elsewhere".

Ranked as the ninth largest country in the world by size, it is also the world's largest landlocked country, with a territory of some 2,727,300 km² (which is greater than the whole of Western Europe). It is bordered by Russia, Kyrgyzstan, Turkmenistan, Uzbekistan and China. On the other hand, and despite its enormous size, Kazakhstan has a comparatively small population. No one actually has an exact idea of the actual size of the Kazakhstan population (not to mention the thorny issue of just how many foreign migrants live and work there), but the US Census Bureau International Database list the current population of Kazakhstan as 16.763 million, while sources drawing their data from the United Nations (like the IMF which I have relied on for the chart below) give a 2008 estimate of 15.135 million. In any event the current population level, after falling in the early 1990s as ethnic Russians left, has now stabilised, and is virtually stationary. This virtually stagnant population constitutes, as we will see, a significant problem for a country with such a massive resource base, and such enormous economic and development potential as Kazakhstan would seem to have.

Record Oil Revenue Boom

Kazakhstan is the biggest energy producer in Central Asia and the country's $100 billion economy has in fact grown at an average of 10 percent a year rate since 2000 (see chart below), in particular as the price of oil has surged. This rapid GDP growth produced a rapid increase in per capita income as well as national creditworthiness, and these in turn sparked in their wake a substantial construction boom. Indeed it has precisely been the bursting of this boom in the autumn of 2007 - on the back of the seize-up in global wholesale money markets which followed August's financial turmoil in the USA - which lies at the heart of Kazakhstan's current growth slowdown. Kazakhstan's economy expanded at a 'mere' 5.3 percent rate in the first quarter of 2008, half the pace achieved in the same period a year earlier, following a dramatic curtailment in bank lending, and if Kazakhstan is still able, despite all the problems we will see below, to maintain some sort of growth momentum at this point it is undoubtedly the result of the oil and other commodity resources which the country has at its disposal, and indeed as part of its initial response to the present crisis the country increased crude production by an annual 6.3 percent in the first four months of the year, according to official government data.

Now one of the most curious details about the present slowdown in Kazakhstan, has been the fact that at the very same time as the economy started to lose velocity the central bank found itself busy struggling to curb an inflation rate which was steadily shooting onwards and upwards towards the outer stratosphere, as revenue from record oil prices pushed up domestic demand, and the resulting construction and consumption boom drove up wages far beyond normal "productivity-gain" rates of increase (remember, there are not THAT many people in the country, and much of the population is rural and unskilled in relation to the needs of a modern technological and services economy). In fact inflation hit year-on-year rates of increase approaching 20% in the autumn of last year (see chart below), although it had dropped by to an annual 18.2% by September.

So, as well as containing the property bust, the Kazakh authorities have also had to conduct an inflation fight (more details below). So far from lowering rates like the US Federal Reserve has been able to do, Karakhstan's central bank was forced to raise the key interest rate to 11 percent in December 2007, at a time when annual inflation was riding at almost 19 percent, the highest for the country in over eight years. The refinancing rate was then maintained at the 11% level until it was finally lowered to 10.5% at the last central bank meeting in July.

Not Just Energy - Vast Resource Potential

The fact that Kazakhstan's industrial output growth has lost a lot of momentum in 2008 as the slowdown in the building industry provoked a slump in cement and other materials production should not take our minds too far away from the fact that the underlying potential in Kazakhstan is enormous. In fact while industrial output growth was reduced to an annual 3.8 percent growth rate in the January-June period, it was at least still growing.

The low point seems to have been hit back in January, when cement production which, not surprisingly, was among the hardest hit sectors, was down 26 percent year on year, the sharpest January fall in five years, as growth in the construction industry stalled, brought to a halt by the fact that the Kazakh banks, who had been struggling to borrow from abroad following the collapse of the U.S. subprime mortgage market, virtually stopped lending to homebuyers and builders.

Copper and rolled-iron output also declined an annual 13 percent in January while output from oil refineries and manufacturing industry decreased an annual 2.9 percent as the problems rolled in. Thus there is evidence of a very sharp shock initially hitting the local economy. On the other hand, since the country is resource rich and the given that first half of 2008 saw a very significant global commodities boom, there were other economic sectors to fall back on, and mining production was up 6 percent from a year earlier in the first quarter, bolstered by an increase in natural gas and coal output, which climbed 15 percent and 11 percent respectively. At the same time crude oil production went up by an annual 5.4 percent.

Apart from oil and gas Kazakhstan has a huge array of potential resource reserves just waiting to be tapped. Among these there is copper. London-listed Kazakhmys accounts for the bulk of Kazakh copper output - and this was down 17.5 percent year-on-year in January-April. Industrial output in Karaganda region, home to Kazakhmys and Arcelor Mittal mines and smelters, declined 5.5 percent year-on-year in January-April.

Kazakhmys reported that their first-quarter output fell 9.9 percent on "severe winter weather'' and repairs at its Balkhash smelter. Production of finished copper plates, or cathodes, from the company's ore fell to 75,500 metric tons, from 83,800 tons a year earlier. These drops in output are, of course not entirely associated with the credit crunch, but they do give an idea of the challenging and volatile environment in which the mining and extraction industries work in Kazakhstan. Realistically speaking it seems quite likely that output in these sectors will return to more normal levels during the second-half of 2008, having alreadt rebounding significantly from the low point reached in the first-quarter.

On the other hand industrial output in capital Astana and commercial hub Almaty, where most construction activities are based, was down 13.2 percent and 8.6 percent, respectively, in January-April, and this activity may well take much longer to recover.

Kazakhstan has also had to cut its 2008 oil production forecast to 67.6 million tonnes (1.35 million barrels per day) from a previous estimate of 70 million tonnes citing maintenance works and transport bottlenecks. The country is able to produce a lot of oil, but it does have a large problem getting that oil to the places where people want it. Three major pipeline routes - the Atyrau-Samara and Caspian Pipeline Consortium (CPC) links to Russia, and the Atasu-Alashankou pipeline to China - carry Kazakh crude off towards its end destinations, but none of these are proving sufficient to the demands on them.

"It is impossible to transport crude out of Kazakhstan without some difficulties," Senior Associate Klara Nurgaziyeva from law firm Dewey & LeBoeuf told an oil and gas conference last week in the Kazakh financial capital Almaty.

This means output is likely to remain roughly stationary since the country produced 67.5 million metric tons of oil and gas condensate in 2007. Kazakhstan has 3.3 percent of the world's proven oil reserves and 1.7 percent of its gas, according to BP's Statistical Review of World Energy.

Kazakhstan also has around 15 percent of world's uranium, most of which is processed at the Ulba Metallurgical Plant in Oskemen, a formerly secret city south of Siberia known in Russian as Ust Kamenogorsk. Management at the Ulba plant are currently planning to invest $850 million, 6.5 times the plant's projected annual cash flow - and offering to trade domestic mineral rights to joint-venture partners in China, Japan and Russia in return for the technology they need in a bid to make Kazakhstan the world's biggest supplier of atomic fuel for civilian nuclear reactors. If successful, Kazatomprom would consolidate the market for its 983 million pounds of recoverable uranium deposits, second in importance only to Australia's, and become less reliant on the raw ore's spot-market price by supplying higher-value products needed to fuel the next generation of reactors.

However one more time let us not forget the natural environment in which all this is situated, since Kazatomprom's East Mynkuduk mines, which are 1,180 kilometers (733 miles) west of Almaty, lie beneath a semi-desert, where camels idly graze is surface temperatures which range from minus 30 degrees Celsius (minus 22 Fahrenheit) in winter to 60 degrees Celsius (140 degrees Fahrenheit) in summer. Kazakhstan is currently uranium ore's third-largest producer, behind Canada and Australia, both of which it plans to surpass by 2010.

On top of oil and uranium Kazakhstan also has 38 percent of the global supply of chromites, used to produce corrosion-resistant steel; 22 percent of all lead; and 16 percent of known silver reserves, according to Renaissance Capital, a Moscow-based investment bank. And on top of all that there is its bauxite, copper, iron and gold. Indeed, while it is not entirely true that Kazakhstan is home to 95% of the elements in the periodic table, the statement isn't that much of an exaggeration.

But what is obvious if we look at the large swings in output which followed the financial shock of last autumn is that the institutional environment is all important. A simple gung-ho "you've got the reources, we've got the money" investment plan won't work without both serious structural reform and systematic inward migration, as we have been seeing. Kazakhstan looks in many ways like the United States did in the middle of the nineteenth century, with lots of spare land and huge resources to be developed, but where the "carrying capacity" of the country in a modern globalised economic environment far exceeds the resources of the native and nomadic peoples who constitute the historic population. Above all Kazakhstan needs the skilled labour force to leverage these resources and it needs to management and infrastructural support to make things work.

In a smoke-filled bar in the Kazakh financial capital Almaty, the laughter of Scottish ex-pats is loud and boisterous. More than three thousand miles (5,491 km) separate the Scottish Highlands and the Central Asian steppe, but a mutual interest in oil and gas has created a surprising alliance. Residents estimate that around 400 Scots live in ex-Soviet Kazakhstan, a resource-rich country roughly the size of western Europe.

Most come from Aberdeen, Britain's northeastern oil hub, and they bring with them their technical expertise."We're going to try attract Kazakhs to Aberdeen over the next few years and look at initiatives, and create further investment in Scotland from Kazakhstan," Lord Provost Peter Stephen of the Aberdeen City Council told an energy conference last week in Almaty. He said over 100 companies from in and around Aberdeen are active in Kazakhstan, and the Scottish oil town even has a Kazakh consulate to serve the hundreds of Kazakhs who go to Scotland to train up for the oil business. The Kazakh-British technical university, set up by a group of Scottish universities seven years ago, occupies a grandiose columned building in the centre of leafy Almaty, which housed parliament before the capital was moved to Astana.

Despite these evident problems there was, however, no shortage of "ready, willing and able" funding available during the boom, and foreign investment flooded the country after the discovery of the Kashagan oil field in 2000. At the time of discovery it was the largest new field unearthed in 30 years, containing 13 billion barrels of recoverable crude, according to Rome-based Eni, Italy's largest oil company, which is currently contracted to develop the Kashagan field along with Exxon Mobil and Royal Dutch Shell .

However, the local authorities have not been totally irresponsible with the new found wealth from the commodities boom, and buoyed by the surging prices, Kazakhstan's National Oil Fund has been busily soaking up the government's share of the new petroleum revenue. As of November 2007, it had amassed $20.1 billion, according to central bank data.

Kazakhstan is also the world's fifth-largest wheat exporter, and even though on April 15 the government placed a temporary ban on wheat exports in an attempt to control inflation, it made it clear that it would once more allow unlimited grain exports after the ban expired in September (a promise which was subsequently kept).

Apart from manpower all these resources also need, as I have been saying, infrastructure, and Kazakhstan is keeping itself busy building roads as well as pipelines. The Kazakh government is currently out looking for investors to build or maintain 1,000 kilometers (620 miles) of roads at a projected cost of 541 billion tenge ($4.5 billion), and doing it in the extremely practical way of accepting financed construction in exchange for operating concessions. One of the planned roads will connect the capital Astana with the regional mining center Karaganda to the southeast, while two more will run from the financial capital Almaty to Kapchagai Lake and Khorgos on the Chinese border. The government also plans to build a ring road around Almaty. The state may build a fifth road from Astana to the Borovoye forest in the north and again seems likely to seek an investor to maintain the road in exchange for operation concessions.

The government also plans to upgrade 2,552 kilometers of roads at a cost of 900 billion tenge to create a highway that would allow freight from Chinese manufacturers to be delivered directly to European markets. The first phase of the upgrade will cost 789.3 billion tenge and is scheduled for completion by 2013. A second phase will be finished in 2016. Kazakhstan has announced it already has agreed finance of 472 billion tenge ($3.93 billion) from banks to start the works.

The Financial Sector

Banks dominate the financial system in Kazakhstan, accounting for 80 percent of total assets. They are mostly locally and privately owned, although foreign participation has increased recently. The system is highly concentrated, with the largest five banks accounting for 78 percent of market share. Banks are very reliant on external financing, with external liabilities making up about 45 percent of the aggregate balance sheet. Easy access to external funding fueled very rapid domestic credit growth, which expanded at an annual average rate of 70 percent from end-2004 to August 2007, bringing bank credit to around 75 percent of GDP by end-2007. Lending was mainly to the household, trade, and construction sectors (the oil sector is not reliant on domestic banks for its financing).

But then, just as the good times were really letting themselves roll, and as does tend to happen with all fairy-tale, too-good-to-be-true-type, stories reality pocked its ugly nose yet one more time into other people's business, and all that lending came to a "sudden stop", almost as quickly as it had started, and confidence in Kazakhstan's banks suddenly plumetted, as investors got nervous that something similar to what had been going on in the US sub-prime case might have been happening.

Or perhaps it was just the speed with which the debt had risen, the speculative nature of a lot of the activity that followed from it, and the front loading of much of the debt towards short term maturities that frightened people. Anyway the consequence was that household deposits contracted sharply during the August–October period while nonresidents sold about $4 billion worth of tenge assets — mostly held in central bank notes — putting in the process significant downward pressure on the value of the tenge.

Credit Downgrades

However, at the heart of the present economc slowdown in Kasakhstan, and just behind the sudden drop in confidence about Kazakhstan's ability to meet its obligations, we should not be surprised to find the construction slump which the imposition of last autumn's credit crunch last gave rise to. Concern about the rate of Kazakhstan's domestic credit expansion does, in fact, go all the way back to an IMF report of October 2006 which argued that the rapid pace of "credit growth and external borrowing in Kazakhstan was making lenders more vulnerable to external shocks such as a reduction in the availability of financing".

As is so often the case, such early warnings were not heeded, indeed quite the contrary, and when the credit crunch finally did arrive the consequences were always going to be pretty severe. Basically the European wholesale money markets, which had during the boom times been looking so favourably on each and every project which the wonders of the mind made it possible to dream up in Kazakhstan suddenly slammed their doors closed, and a number of local banks, who were in the uncomfortable situation of struggling night and day to try to borrow from overseas financial institutions (just like the Hungarian and Ukrainian banks in the last two weeks), had little alternative but to effectively cease lending to homebuyers and builders in September 2007.

Obviously the blame here can be shared out around a number of parties. Domestic authorities who did little to restrain the property and lending boom, and the international investor community who, it seemed, only needed to hear the long list of Kazakhstan's undoubted natural resources to drool and march up to put their money on the table without any kind of serious due reflection as to the serious infrastructural and instititional problems the country was almost bound to have.

And when the stop came, it came abruptly. Kazakhstan bank sales of Eurobonds and syndicated loans, which had totaled $8.63 billion during the first eight months of 2007, suddenly plummeted to an estimated $300 million in the three months from October to December. Hence my references throughout this post to Kazakhstan's "sudden stop".

And the list of those who had previously been busying themselves arranging the deals for Kazakhstan's banks looks just like a who's who of international finance: New York-based Citigroup Inc., the largest U.S. bank by assets, edged out Amsterdam-based ING Groep NV (you know, the ones who have just been bailed out by the Dutch government), as the top underwriter. New York-based JPMorgan Chase & Co., the third-largest U.S. bank; Frankfurt-based Deutsche Bank AG, Germany's largest lender; and Zurich-based Credit Suisse Group, Switzerland's second-biggest, were all at the front of the queue.

Kazakhstan banks also attracted international equity investors. In November 2006, JSC Kazkommertsbank, Kazakhstan's biggest bank by assets, sold $846 million of global depositary receipts in London. JSC Halyk Savings Bank, majority owned by President Nazarbayev's daughter Dinara and her husband, followed in December with a $748 million sale. JSC Alliance Bank, the country's largest consumer lender, sold $704 million of global depositary receipts in July 2007. All three are based in Almaty, the country's financial center.

The outside money helped the country's banks grow their assets 10-fold between 2002 and 2007, to $94.7 billion as of Nov. 1 2007. It also left the banks vulnerable when investors began retrenching.

From August through October 2007, $6.8 billion in foreign currency flowed out of the country - 28 percent of the central bank's total reserves. With the country's banks largely shut off from international borrowing, the ratings agencies started to get nervous. Standard and Poor's started the ball rolling by lowering Kazakhstan' foreign currency rating in October. By November the cracks were becoming visible, with the construction industry slowing rapidly.

The evolving situation lead to an ongoing series of "reappraisals" of Kazakh bank creditworthiness on the part of the ratings agencies, with Standard and Poor's following its initial October downgrade of the country's foreign currency-denominated debt rating (by one level to BBB-) by a revision on the outlook on Kazakh banks to negative in December. Fitch Ratings also changed its outlook on Kazakhstan's long-term issuer default ratings to negative in December, and even the Kazahstan sovereign rating outlook was revised to negative by S&P in late April 2008.

Moody's Investors Service joined the act, and reduced the credit ratings of six Kazakh banks, including TuranAlem, in November because of concerns they wouldn't be able to refinance about $40 billion of international debt. Kazkommertsbank and Bank TuranAlem were cut to Ba1, one step below investment grade. Halyk was lowered to Baa3, the lowest investment grade, while TemirBank dropped to Ba2 from Ba1.

In an attempt to stop the haemorrage the government stepped in and provided lenders with almost $11 billion of emergency cash, reducing in the process central bank reserves by almost a quarter. The government also moved to place new limits on local banks' foreign debt (according to the new regulation they will now be able to accumulate only up to a maximum of four times their capital base - beginning July 1, 2009). This move is expected to cut dependence on borrowing from abroad, although as a result commercial lending growth may slow to 13 percent this year according to central bank estimates, possibly reaching as much as 8.22 trillion tenge ($68.4 billion), compared with 7.26 trillion tenge in 2007. However - in a "worst-case-scenario" - the central bank warned that banks may post a 9.5 percent drop in commercial lending in the country this year, should access to foreign capital markets not be made available again.

At the same time the Kazakhstan government indicated during the summer that it was prepared to lend $4 billion to banks to ensure liquidity. The banks also were expected to get "about 300 billion tenge ($2.48 billion) of free money" due to a decision to reduce the size of bank reserve holdings with the central bank. The government has also said it will continue to purchase shares of Kazakh companies listed on foreign exchanges until they reach pre-August 2007 levels. Looking at the MCSI Kazakhstan core index, it would seem to me that they still have some distance to travel if this objective is to be achieved.

Kazakhstan banks' foreign liabilities rose 490 percent in dollar terms between 2004 and the start of 2008 - to $13.5 billion - as they used their investment-grade ratings to borrow abroad and lend to consumers and real-estate developers, according to CreditSights. This debt has now become impossibly difficult to refinance because of investor wariness about all but the highest-rated debt. Kazakhstan's central bank holds about $20 billion of reserves and the country's oil fund has about $15 billion, so if push comes to shove they should be able to ensure Kazakh banks have sufficient funds to meet their obligations.

By June, credit-default swaps on Kazkommertsbank had surged to 694 basis points from an earlier 225 basis points, according to CMA DataVision. CDS contracts, which are used to speculate on a company or country's ability to repay debt, increase when perceptions of credit quality worsen. But this was very small beer, and the position has recently deteriorated quite alarmingly, with the cost of protecting bonds issued by BTA Bank, Kazakhstan's biggest lender, have more than doubled in the past month to 3,685 basis points (or 36.85%), while credit-default swaps on AO Kazkommertsbank cost 2,800 basis points (or 28%), according to prices at the time of writing from CMA Datavision.

All kinds of assets and revenue flows have been used as collateral in a desparate attempt to secure refinance for the debt, and one of the most innovative examples of this is the package that Bank TuranAlem JSC, Kazakhstan's second-largest lender, put together last October - via ABM Amro and Standard Chartered - to sell $750 million of bonds in a DPR (diversified payment rights) securitisation scheme backed by foreign currency remittances from migrants. The deal is the largest bond sale of its kind ever by a Kazakh bank. The bonds were sold in four portions. Three were guaranteed by bond insurers and carried top ratings from Moody's Investors Service and Standard & Poor's. The other bond, which isn't guaranteed, is rated Baa3 by Moody's, the lowest level of investment grade, and an equivalent BBB- by S&P.

Construction Slump

After several years of rapid rises, Kazakhstan property prices are now declining, most notably in Almaty where the prices of existing homes are reportedly down (on IMF estimates) by anything up to 40 percent from their peak. This decline has partly corrected previous overvaluation, although the price adjustment may have further to go, particularly if credit availability and household incomes continue to weaken.

As well as the banks, Kazakh homebuyers also found themselves suddenly left out in the cold by the global credit shortage. In Almaty, the Kazakhstan's biggest city, about 30 people were to be seen on March 18 in protest at the hole in the ground which was to be found where their new apartments were supposed to have been. Work stopped on the project after builder AO Corporation Kuat declared it was unable to get further funding.

About 29,000 people had prepaid for apartments which were uncompleted when the September squeeze arrived, and credit for Kazakh builders suddenly dried up. More than 140 housing projects were halted in Almaty alone, forcing the government to say it was going to provide $4 billion of emergency funding to get contractors working again. Kazakh construction companies had sold 280 billion tenge ($2.32 billion) of unfinished apartments by September, including 170 billion tenge financed by mortgages, according to government statistics.

Homebuyers have been receiving some help from the government, which in March 13 agreed to provide $500 million to help banks finance loans to builders in Almaty, although many are vociferous in saying that the money has not been arriving to them as promised. The governments announced $4 billion emergency investment program also includes funds to purchase 6,000 uncompleted apartments in Astana, the capital.

Prices for residential property soared 30.2 percent in 2007, reaching a record average mid-year high of 161,300 tenge ($1,338) per square meter, up from 123,900 tenge in 2006, according to the Astana-based state statistics agency. In the financial capital, Almaty, the average price was 345,200 tenge.

The drop in prices from these peaks and the sudden drying up of credit has caused numerous problems for would.be buyers, and Bank TuranAlem, Kazakhstan's second-biggest bank by assets, received $81.2 million last December from the state emergency investment program simply to finance the completion of unfinished construction projects.

The most recent government bailout of the construction sector was announced during the summer - just two weeks before the celebrations of Nazarbayev's 68th birthday and the 10th anniversary of the founding of the new capital Astana on July 6 - following the announcement by a group representing people who had purchased apartments in the unfinished buildings that they were planning a protest march to be held in Astana bang in the middle of the official festivities.

The Industry and Trade Ministry have said that there were 939 residential buildings, with 45,130 apartments pre-paid by homebuyers, under construction as of last January. Minister Edil Mamytbekov said in July that the cases of 4,558 homebuyers in 18 buildings "remain problematic'' because of conduct for which the builders in question had been "charged with crimes.'' The Kazakh Prosecutor General's Office said 123 construction companies that received 104 billion tenge ($865 million) in pre-payments from homebuyers were behind schedule or haven't even begun work on new apartment buildings.

Assets of "careless construction companies,'' including buildings and vehicles, have been seized to compensate lost investments of homebuyers and the government, according to the Prosecutor General's Office. Criminal investigations have been opened into eight companies. A total of 285 companies are building 407 residential projects in Kazakhstan and have received 231 billion tenge in pre-payments from more than 50,000 individuals and companies, prosecutors said. Of 200 ``problem'' projects delayed by at least six months, 110 are located in the capital Astana and 42 in Almaty.

The July rumpus was provoked by the fact that at the start of the summer the Kazakh government had spent only 51 billion tenge to complete stalled residential projects, a fraction of the bailouts promised by Prime Minister Karim Masimov in the autumn of 2007, according to data made public by the Ministry of Industry and Trade on June 23. The government had said on Nov. 14 2007 that it would spend $1 billion by the end of 2007 and another $3 billion in 2008 to "provide economic stability and growth'' by supporting the real estate market and small and medium-sized businesses. Following publication of this data, and some international press coverage, Masimov said that his original emergency investment program was in the process of being expanded, and his government announced plans to spend 17.2 billion tenge to complete residential projects in Astana.

President Nursultan Nazarbayev instructed the state to step in and finish projects, ``which have no source of financing,'' to ``help to reduce social tension,'' according to Edil Mamytbekov, a deputy minister of industry and trade, on June 20. President Nursultan Nazarbayev also said it was necessary to take ``tough measures against careless builders". As a result the Almaty mayors office announced on July 26 that another 46.4 billion tenge had been allocated to support residential projects in Almaty. The state had already invested 22.4 billion tenge and was going to spend the remaining 24 billion tenge by year's end, according to the announcement.

In April, however, the government had announced that the state development holding Kazyna would distribute 59 billion tenge to commercial banks during 2007 to finish 131 buildings in Almaty. Sergei Kuyanov, spokesman for Almaty Mayor Akhmetzhan Yesimov, declined to comment on the discrepancy between the numbers when question by journalists in July.

Whatever the complications of the present situation and the ins-and-outs of putting the construction and banking problems straight, we should not lose sight of the fact that Kazakhstan has, large financial resources which will surely help it weather the current situation. Official foreign currency assets totaled $46 billion in early June, comprising NBK reserves of $21 billion and oil fund (NFRK) assets of $25 billion. Commercial banks also have foreign assets of which about $3.5 billion are thought to be liquid. Total foreign assets broadly match foreign liabilities when the intracompany debt of the oil sector is excluded, while liquid foreign currency assets comfortably cover potential short-term foreign currency drains.

Favourable Demographics But Migrants Needed, And With Them Modern Citizenship Rights

The chart you will find below is known as a “heat chart”. It depicts the ongoing changes in Kazakhstan's age structure. Each dot represents the number of people in any given age group at any given point in time. A dark red dot represents the largest concentration of people, by age, in a particular year while deep blue dots show the lowest concentrations. A single dark red dot is the equivalent of almost 406,000 people while each deep blue dot represents nearly 23,000 people.

In the upper left-hand corner of the chart the bright reds and yellow areas depicts the population boom that started in the mid 1970s and lasted until the late 1990s. The remnants of that boom extend downward from left to right across the chart. The band also narrows as this population segment ages. This is simply a reflection of the reduction in the total numbers in the population bulge cohorts as out-migration has taken its toll.

Many ethnic Germans and Russians, for example, left Kazakhstan during the years following the end of the Cold War. In the lower left-hand side of the chart there is a preponderance of dark blue dots, indicating a relatively small number of people over the age of 60 years. Over time these dark blue dots are replaced by light blues and greens, a pattern reflecting a gradual but steady increase in the number of elderly people.

Kazakhstan’s population has fluctuated notably over time, rising during the 1980s and then declining during the 1990s (mainly due to outward migration). A low point occurred in 2001 but population has been rising since, with the upward trend expected to continue through 2020 when total population is projected to reach an all-time high of 16.7 million – reflecting a natural increase of 1.8 million between 1980 and 2020 - before the long run impact of below replacement fertility locks-in, and the population starts to decline.

The number of potential workers (those between 15 and 64 years of age) will gradually "peak" - after having increased by a total of 1.9 million between 1980 and 2020 , while the number of those over 60 will nearly double, growing by more than 1 million in absolute terms.

The Kazazh government, being aware of the country's enormous resource wealth and the need for a labour force large enough to exploit it, is taking a different view on this situation from its CEE peers, and is actively promoting the idea that the country's population should rise to around 20 million by 2015. Clearly given the fact that Kazakh fertility (1.89 tfr 2007) is already below replacement, and heading downwards, this target is only achievable via significant inward migration. However, while much of Kazakhstan's large surface area is desolate and uninhabitable, the densly populated urban areas currently lack the physical and social infrastructure necessary to accommodate any such lincrease in numbers. So to hit its "optimum" level of economic and social development the country needs both a positive migration policy and substantial infrastructural development in order to be able to adequately accommodate the new population.

Migration is nothing new for Kazakhstan, since its "no mans land" type location has meant that it has long been a transit point on the migration route of people back-and-forth between Asia and Europe. Kazakhsytans importance was only enhanced by the fact that historically it was used by Moscow as destination point to which colonists, dissidents, and other minority groups could be sent. Such groups included Volga Germans, Poles, Ukrainians, Crimean Tartars and Kalmyks.

Soviet-era policies were also designed to encourage the movement of ethnic Russians to the periphery of the then Soviet Union. As a result, by 1980 Russians had the largest nationality (exceeding even the Kazakh population) , and constituted slightly over two-fifths of the total.

After the fall of the Soviet Union, Kazakhstan's German population emigrated en masse, lured by better economic prospects, ethnic ties to their original homeland and Berlin’s generous programmes for resettlement. More than a quarter of Kazakhstan's ethnic Russian population returned to Russia during the 1990s, and the departure of such a large number of Russians had a particularly dramatic impact owing to their concentration in key urban areas (particularly in the then capital Almaty) and in specific occupations. In Almaty and a few other cities, Russians significantly outnumbered ethnic Kazakhs; they had their own cultural life, spoke their language freely and never even stopped to learn the local language. They also enjoyed a privileged occupational status, accounting for a disproportionate number of managers, scientists, professors, engineering-technical specialists, and other high-wage, high prestige professions. Filling the gaps created in Kazakhstans human capital resource base by the subsequent exodus of this population now constitutes one of the most important development challenges facing the country.

In order to facilitate the rapid population growth the government understands that the country needs, they have, as I say, set targets to increase the population from 15 million in 2005 to 20 million in 2015, including introducing programs for the return migration of 4.5 million ethnic Kazakhs - so called "oralmans" - from neighbouring countries in Central Asia, Turkey, Mongolia, and China. Although 374,000 oralmans have returned to Kazakhstan in recent years, this is not proving to be a hugely successful programme and the bulk of Kazakhstan’s current population growth is rather the result of illegal migration from other neighbouring countries in Central Asia.

At the present time the majority of migrant workers coming to Kazakhstan are Uzbeks and Kyrgyz nationals, although the number of Tajik migrants currently working in Kazakhstan is small in comparison compared with the size of their presence in Russia. Since the mid-1990s, Tajiks have been fleeing their country in significant numbers and the have mainly entered Kazakhstan either as refugees or externally displaced persons.

Tajik migrant workers in Kazakhstan are engaged mainly in seasonal agricultural employment. Many of them often work irregularly. According to some sources around 12,000 Tajik citizens were residing illegally in Almaty in 2006. Many Tajiks are working as traders in markets, selling agricultural products.

Large numbers of migrants from the other Central Asian countries are drawn to Kazakhstan quite simply because it is easier to move there than it is to move to Russia; xenophobia is much less rife; and the rhythm of economic development makes it very attractive in salary terms. According to official estimates, about 500,000 migrants from other Central Asian Republics work in Kazakhstan. At the CIS summit in October 2007, the Kazakh government distinguished itself by promoting a resolution which involved a series of legal and social protection measures for migrants.

According to a recent study by Marlène Laruelle of the Central-Asia Caucasus institute, more than half of Kazakhstan’s Central Asian migrants are comprised of Uzbeks, while around 200,000 are Kyrgyz and around 50,000 Tajiks. The majority of migrants are concentrated in four regions: Almaty, Astana, Atyrau and southern Kazakhstan. In the first two regions, migrants are chiefly employed in the construction industry, while in Atyrau, several tens of thousands of workers (according to some sources, at least 30,000 Uzbeks) work in the oil industry. In southern Kazakhstan, predominantly Uzbek migrants are employed in the agriculture, especially in cotton fields. In Kazakhstan, a kilogram of cotton pays US$0.40 compared with only US$0.05 in Uzbekistan. As for the Kyrgyz, a large number of them work on tobacco plantations.

According to Laruelle, nearly a third of the migrants work in the construction industry, another third in convenience services (the food service industry, small business, home repairs services), and the other third in agriculture. The highest salaries are in the construction sector (about US$200 per month), whereas those in agriculture earn a lot less (about US$80 per month). Although the overwhelming majority of migrants are male, there are now an increasing number of female migrants: in 2002, women made up only 15 percent of Uzbek migrants to Kazakhstan, but by 2004 they were nearly a quarter. Kazakhstan has had labour shortages in sectors largely staffed by women, such as agriculture, the tertiary sector of the food service industry, and domestic services.

Central Asian migrations to Kazakhstan can be divided into three categories: daily, temporary, and permanent. The first takes place notably in the border regions of southern Kazakhstan, where an increasing number of Uzbeks commute to work on the Kazakh side of the border during the day, and return home at evening. Regular border closures and administrative complications at customs often trigger tensions among villagers who have become economically dependent on being able to cross the border.

The border post at Zhybek Zholy, for instance, is crossed by more than 4,000 Uzbek migrants every day. But for the majority of migrants, leaving for Kazakhstan is temporary. The length of stays thus vary largely depending on available opportunities: mostly they last between two and eight months, with construction work being seasonal, mainly in spring and summer, and while work tends to be concentrated in the autumn. Many hope to return to their own countries after accumulating sufficient capital to construct a house or start up a small business. However, there are a growing number of migrants who decide to stay on a permanent basis. Between 1999 and 2004, more than 130,000 Uzbeks, drawn by higher living standards (an average Uzbek salary is around US$40 dollars, compared to 250 in Kazakhstan), moved to Kazakhstan permanently.

The Kazakh authorities are fully aware of the size of the migratory phenomenon and do nothing to actively resist these flows. Indeed the government has stated on multiple occasions that its citizens are not in competition for the work done by migrants because the latter fill a specific social niche, as they tend to take the poor paying jobs normally refused by Kazakhstani citizens. The authorities nevertheless are seeking to reduce illegal immigration and to encourage legal migration.

Thus, in 2006, the Minister of the Interior finally legalized 164,000 migrants from other CIS countries, despite having initially announced that the number would be only 100,000. Out of these, nearly 120,000 were from Uzbekistan, 23,000 from Kyrgyzstan, 10,000 from Russia and nearly 5,000 from Tajikistan. Astana’s open policy on migration has also led to the naturalization of many migrants: in 2005, more than 20,000 persons were granted Kazakhstani citizenship, three-quarters of these from Uzbekistan, 10 percent from Kyrgyzstan, and 5 percent from Tajikistan.

Although migratory relations between Kazakhstan and Kyrgyzstan are good, managing migratory flows between Kazakhstan and Uzbekistan has proved more difficult. Tashkent refuses to acknowledge the scale of the phenomenon. The Uzbek state has a monopoly on the legal dispatching of workers abroad, meaning each migrant is obliged to obtain official authorization from the Uzbek Agency of Work Migration. Since 2006-2007, the Uzbek government has also sought to hive off some of the financial flows of its “Gastarbeiters”. According to a government resolution “On registration of citizens seeking employment abroad”, Uzbek labor migrants have to come back to Uzbekistan, go through registration and pay customs dues before returning to work abroad. As a result, the majority of Uzbeks leave without legal permission and thereafter are unable to seek protection from their home state. This situation promotes human trafficking and the organization of mafia networks by recruiters who go from door to door asking for volunteers to work in Kazakhstan.

Working conditions for Central Asian migrants in Kazakhstan are still relatively poor, a fact which is not that surprising given the kind of work they do. And legislation dealing with all this immigration continues to be largely inadequte, being light on penalties for those employers who abuse the system while failing to guarantee minimum social rights for newly arrived migrants.

Main Risk Factors

Returning now to the economic front, and to Karim Masimov's assurance, the principal short-term risks to Kazakhstan's slow landing would seem to be threefold: (i) a prolonged period of tight conditions in global financial markets; (ii) a substantial drop in oil prices and other commodity prices, and/or; (iii) a major domestic event that triggered a loss of confidence in the banks. All or any of these could easily cause a process which was now largely under control to become much less so.

Looking forward, growth is expected to remain relatively subdued. Assuming limited bank access to external financing and only modest deposit growth, credit within the economy is likely to decline in real terms. Nonoil GDP growth is forecast by the IMF to slow to 4.7 percent this year, from 9.2 percent in 2007, with spillovers from the oil sector partly mitigating the impact of the credit crunch. Oil output should support somewhat stronger overall growth of close to 5 percent in 2008. A strengthening in growth to 6.25 percent is projected next year assuming global financial conditions improve and pressures on bank balance sheets are reduced. The current account is even projected to move into surplus in 2008, following the large deficit last year, due to higher oil and commodity prices and much slower import growth. With banks repaying debt, the external debt/GDP ratio is projected to fall sharply this year, and appears to be on a sustainable path under a range of scenarios, while the overall government budget surplus is projected to increase to 6.75 percent of GDP in 2008 due to strong oil revenue growth.
Exchange rate stability is a central policy objective of the NBK. At present, exchange rate stability is viewed as essential for maintaining depositor confidence, limiting the risks from the large foreign currency exposure of the corporate sector, and helping reduce inflation. The central bank noted that downward pressures on the exchange rate had abated since the turn of the year, and its foreign currency reserves have been rising, in part due to the decision to delay the automatic conversion of oil fund revenues into foreign currency assets. The country’s official foreign assets (NBK reserves and NFRK assets) are now well above the level reached prior to the onset of market volatility in August 2007. Intervention in the foreign exchange market has been substantially scaled back (as a share of total transactions) in recent months, although the NBK stands ready to intervene in the market if downward pressures on the exchange rate re-emerge. The authorities continue to view the exchange rate regime as a "managed float with no predetermined path for the exchange rate."

The NFRK continues to be managed prudently, and the government does not
expect to draw on the Fund beyond the amount of the guaranteed annual transfer to the
budget. The assets of NFRK consist of a stabilization portfolio of about $5 billion (invested in short-term debt securities) and an investment portfolio (invested in longer-term debt and equity securities). While the NFRK fulfils both a stabilization and savings role, at present the government has no intention to use the Fund’s assets to help cushion the downturn. Indeed, the government spent only 86 percent of the guaranteed transfer from the NFRK last year, and expects the mandated transfer to be adequate to meet spending needs this year.

The exchange rate regime in Kazakhstan has been reclassified from a managed
float to a conventional peg under the IMF’s de facto classification system. This is due to the very limited movement of the tenge against the U.S. dollar since last October. At present, the IMF take the view that there is no clear evidence of either over or undervaluation of Kazakhstan’s real exchange rate when compared to its estimated equilibrium level.

Kazakhstan fiscal position is very strong. It has a large budget surplus and low public debt. And external debt has been reduced from 92.8% of GDP in 2007 to an estimated 67.9% in 2008, with the IMF forecasting a further reduction to 59.6% in 2009. The IMF said the following in their most recent concluding Mission statement in September:

The strong budget position in Kazakhstan has provided scope for the government to use fiscal policy to support the economy as growth has slowed. We believe that the increase in spending in the recent supplementary budget is appropriate, and that the automatic fiscal stabilizers should be allowed to work, with any revenue shortfalls due to a weakening economy being accommodated in the near future rather than offset with expenditure cuts to meet budget targets. Going forward, the government's recently announced three-year budget plan maps out a transparent path for fiscal policy over the medium-term. We believe, however, that it is important that the government not commit to further large increases in public sector wages and pensions in future years given uncertainties about budget revenues—particularly from the oil sector—and the stage of the macroeconomic cycle in two or three years time.

The Kazakh government is to buy as much as $5 billion of distressed assets from banks in the next two years and will seek to spur growth by spending up to $10 billion from the National Oil Fund on agriculture and development projects. The government is also going to release 52 billion tenge ($430 million) for a bank-rescue fund.

However, not everything is going to be plain sailing. Oil has now tumbled to as little as $72 a barrel, down is down $75 — or 51 percent — since catapulting to a record high of $147.27 on July 11.

Commodity prices continued their downward march last week, with the Reuters/Jeffries CRB Index of 19 raw materials from coffee to silver, dropping 3.6 per cent amid concerns that the global economy was heading into recession. The abrupt falls in commodities - the RJ-CRB index hit its lowest level in four years - even engulfed gold , which closede last Friday at a one-month low of $775 a troy ounce,

And property prices continue to fall, which prices in the Kazakhstan's largest city Almaty are now down at 15 percent from a year ago (according to the national statistics agency) and more like 40% according to sources cited by the IMF. Net income at Kazakhstan's 36 banks fell 47 percent the first eight months of this year as lenders put aside more money to cover bad loans. So there should be no doubt that conditions in Kazakhstan at this point are "tight".

However, in contrast with Iceland, Kazakhstan has $49.5 billion of reserves to weather its crisis in the short term. That includes $27.6 billion in the National Oil Fund created eight years ago to guard against a drop in oil prices. The existence of this fund means that the Kazakh government could repay all $13.7 billion of foreign debt due in the second half this year, including $9.3 billion owed by banks. The reserves would also cover the $16.9 billion of debt maturing next year, including $6.9 billion owned by banks, according to a recent report by Goldman Sachs, which cites National Bank of Kazakhstan data.

We should also stop for a moment and think about the implications of assuming that oil and other commodity prices will not rebound as we move through 2009. The implication here would be that global demand would have dropped and stayed down. If we go for that scenario, this would seem to imply a generalised recession in the developed economies of almost unprecedented depth (at least in post WWII terms). While not doubting that some individual countries (Spain, for example) may be in for a very rough ride indeed, I am not convinced that conditions will universally deteriorate to this extent. We will have a recession in 2009, but hope fully it will not be so deep as to send Kazakhstan off into Iceland-type bankruptcy.

Let me put this another way, if the recession is so deep that Kazakhstan goes off into receivership, then I dread to think what the situation will look like almost universally across the CEE.

So then, to return to my original question which was posed at the start of this post: should we simply believe Karim Masimov when he tells that Kazakhstan won't be needing that IMF help? Well no we shouldn't, since among other things he would be saying that, wouldn't he - and if you don't believe me just look what the rest of East European walking wounded are saying as they amble in.

But we don't have to take Masimov's word for it in this case, since there are other, more objective evaluations of the situation available. So why don't we close by taking a look at what the IMF themselves have been saying, in this case in their September 28 Mission Concluding Report. At this point in time their assessment and judgement is good enough for me, especially since I think the principal arguments they advance make a lot of sense.

Kazakhstan has large financial resources to help it weather the current situation, and medium-term economic prospects remain favorable. Official foreign currency assets, comprising central bank (NBK) reserves and oil fund (NFRK) assets, reached $48 billion at end-September, well above the mid-2007 level. The current account balance has strengthened significantly this year, and oil production is set to increase substantially in the years ahead.

As at the time of the Article IV consultation discussions in April, we believe that in the short-term policies should remain focused on managing risks to the outlook and setting the stage for the resumption of strong and sustained growth. Since our last visit, the authorities have continued to skillfully handle the difficulties the economy has faced, and we welcome the policy steps that are being taken in the monetary, fiscal, and supervisory areas to strengthen the resilience of the Kazakhstani economy. Nevertheless, considerable challenges remain, and these have been heightened by the renewed bout of global financial market volatility.

Russia’s Crisis Spreads Right Across The Domestic Credit Market

Edward Hugh — Fri, 03 Oct 2008 07:31:00 +0000

by Edward Hugh: Barcelona

Well the action in Russia this week has moved on slightly, and the damage has started to spread from pressure on the domestic stock market (accompanied by capital flight) to the real economy - via a very rapid tightening in credit conditions for Russian domestic users. We are also seeing a rapid slowdown in Russian manufacturing industry as internal demand slows while the inflation-driven decline in cost competitiveness continues to make imported products (where available) an attractive alternative to the home produced variant.

Emerging-market bonds have been generally falling this week as the U.S. Senate's approval of a $700 billion bank rescue package did little to revive demand for riskier debt, and Russia has, unsurprisingly, been among the worst affected. The extra yield investors demand to own developing-nation bonds rather than U.S. Treasuries rose 8 basis points yestreday to 4.14 percentage points after widening 12 basis points on Wednesday, according to the JPMorgan Chase EMBI+ index. At the same time the MSCI Emerging Markets Index of stocks fell 0.3 percent to 783.79, its lowest point in four days. While such data readouts do not of course exclusively define the outlook for the Russian economy, they do give us a good indication of the context within which economic activity occurs, and they also give us a very clear measure of the current level of global risk sentiment whose influence, as we will see below, lies right at the heart of the immediate shock that is hitting Russian households and businesses.

Central Bank Reserves Actually Rise

One indication of the slightly different panorama to be found in Russia this week - and of the way in which the recent government intervention is moving the focal point of the crisis away from the equity markets and into the credit ones - is to be found in the little detail that the dollar value of Russia's international reserves actually rose $3.4 billion last week, following consecutive declines during each of the three previous weeks, according to data released this week by Bank Rosii. The value of Russia's Forex reserves increased to $562.8 billion in the week to Sept. 26, after decreasing $900 million to $559.4 billion in the previous week. A significant decline in the value of the dollar (which only represents about 47% of the reserves basket) seems to have been behind what is really a technical revaluation - given that the effect is produced by the rest of the currencies in the basket rising in value against the dollar. But there is no doubting the fact that the capital flight has - for the time being - lost momentum, even though the central bank felt forced to sell an estimated $4.9 billion from the reserves last week to support the ruble, and an estimated $20.6 billion over the last four weeks.

About 47 percent of Russia's reserves are held in U.S. dollars, 42 percent in euros, 10 percent in pounds and 1 percent in yen, according to the most recent figures released by the central bank on June 30, 2007. The share of the reserves held in Swiss francs was reported as being "insignificant''.

Moody's Dowgrades Russian Banks

But while the bloodletting on the foreign exchange side seems to have abated for the time being - PNB Paribas estmated that some $57 billion were taken out of the country between Aug. 8 and Sept. 19, BNP Paribas - the outlook for Russia's banking system has deteriorated significantly after been downgraded to a "negative'' rating by Moody's Investors Services last week.

Slowing asset growth, higher inflation and a decline in equities may constitute as lethal cocktail which produce a sytematic deterioration in the undelying fundamental of Russian banks, is the conclusion many investors are drawing from Moody's latest "Banking System Outlook for Russia" report. Moody's main expressed concern was the way in which Russian banks hadn't cut back their lending in response to the recent change in risk sentiment, thus increasing their risk profile. The "structural weaknesses'' that surfaced this month in Russia's banking system and the possible impact of the global credit squeeze may hurt the ability of banks to repay debt and attract financing, Moody's said in the report. Both OAO Sberbank and VTB Group, Russia's biggest banks, declined following the issuing of the Moody's report. Indeed only this morning (Friday) VTB shares have fallen back one more time, after the bank announced it lost 9.31 billion rubles ($360 million) in September due to ``negative market dynamics.'' Nine-month net income for the bank (under Russian accounting standards) fell to 7.44 billion rubles from the 16.8 billion rubles in the first eight months of the year declared in August. The drop followed a "revaluation of the bank's securities portfolio,'' according to the accompanying statement.

And the other main credit rating agencies have not exactly been silent, with Fitch stating earlier this month that Russian real estate and construction companies are the most at risk as domestic and international banks curb lending, while Russia's credit outlook was cut to "stable'' from "positive'' by Standard & Poor's on Sept. 19. S&P's made the point that the Russian authorities face growing pressure to spend the country's oil generated reserve funds, undermining the country's longer term credit strength. They did however maintain Russia's rating of BBB+, the third- lowest investment grade ranking.

Lending Conditions Tighten

Of course the result of these downgrades (coming hard on the heels of the loss of confidence in the ability of the Russian institutional system to reform itself) wasn't hard to anticipate or slow in coming, and Russia's largest lender, the state-controlled, Sberbank reported on Wednesday that it was going to raise interest rates on retail loans due to the sharp rise in its own borrowing costs. This would seem to be the first major trickle-down from the global financial turmoil onto ordinary Russian citizens, who are already struggling to see the wood from the trees under the impact of double-digit inflation rates. The point about Russia's 15% inflation rate isn't simply the "Alice in Wonderland" quality it has given to Russia's recent growth spurt, what we need to think about is the way in which it distorts all those fundamental day to day decisions which the economy's principal actors (households, companies and the government) need to take. Thus, there is much more to think about in the Russian context than the evident fact that it is a "resource rich country": long term structural distortions which go unattended are never good news.

And with 32 percent of the retail lending market, Sberbank's move will have a rapid impact on millions of ordinary Russians - since interest rates on loans are set to rise by anything between 0.25-2.25 percentage points, depending on the type of loan, and the quality of the collateral offered as guarantee. And, of course, the other consumer banks are all set to follow Sberbank's lead in adjusting their lending conditions.

Sberbank is reported to be in the process of securing a $1.2 billion loan which will be 40 basis points more expensive than its last syndicated loan - a $750 million credit taken out in December 2007, before the impact of the credit crunch was really felt. Sberbank has said it will start passing these extra costs on to new customers immediately, while loan agreements that have already been signed will remain unchanged.

Hardest hit will be rates on mortgage loans taken out in roubles, which will increase by 1.25-2.25 percentage points, while rates for mortgages in foreign currencies will go up between 0.75-1.75 percentage points. Thus interest charged on these loans will rise to between 12.75 and 15.5 percent, depending on the type of collateral and other factors. Interest on other consumer loans - such as cash loans or for consumer durables - will be up by an estimated 1 percentage point on average.

Property Market Starts To Crash

And the trickle-down on loans is rapidly becoming a torrent on the mortgages front. One of the first casualties here would seem to be Moscow's decade-long building boom as the sharp rise in interest rates squeezes developers in what has suddenly become the world's third most expensive property market - bettered only by Monaco and London, according to Global Property Guide.

The case of the Mirax Group - the Moscow-based company that's building the Federation Tower, which will be Europe's tallest skyscraper when completed - is typical, since Mirax have just had to cancel plans to develop 10 million square meters (108 million square feet) of commercial and residential space after they found that interest rates on some loans had risen to as high as 25 percent.

Higher borrowing costs already are hitting demand for apartments, and Moscow-based Real Estate Market Indicators report that prices may fall in the fourth quarter of 2008 and continue falling in 2009. If this happens it will be the first decline in Moscow property prices in 11 years, they say. The property consultants suggest the drop may reach as much as 30 percent for some types of apartments by the end of 2009. This assertion is very hard to judge, but does give some indication of the kind of decline we may see.

Prices for homes in Moscow have risen more than sixfold since 2003. In the first six months of 2008 they were up 25 percent, reaching a record average price of 136,404 rubles ($5,318) per square meter, according to data from Metrinfo.ru, a market research company. Since June prices have climbed another 13 percent.

And it isn't just in Moscow that the credit crunch is tightening its grip, Russian developers are also cutting apartment prices in the regions as a decline in mortgage lending lowers demand for housing. According to Russia's regional press, sales of new apartments in Rostov-on-Don are down 40 percent this month from August, while sales in St. Petersburg have fallen by half since the spring. Prices are said to have declined as much as 24 percent as a result.

And the investment analysts are hitting Russian real estate hard. JPMorgan advised investors, in a research note this week, to "steer clear'' of Russian real-estate stocks since the Russian property sector is expected to be one of the "hardest hit'' in a global recession, while Unicredit analysts state that "The current situation in Moscow partly resembles Japan's real-estate crisis of the 1990s" - personally I think that this is altogether the wrong comparison, but it does give some idea of the seriousness of the situation.

Russia's builders have also started to take a beating. Shares of Sistema-Hals, the property company owned by billionaire Vladimir Yevtushenkov, dropped 25 percent to 75 cents at one point in London trading on Wednesday, touching their lowest level since shares began trading in November 2006, while PIK, the Russian developer with the highest market cap, has lost 78 percent of its value since going ahead with an initial public offering in June 2007. OAO Open Investment, Russia's second-largest publicly traded property company, has declined 52 percent this year. LSR Group, the Russian developer and building-materials maker controlled by billionaire Andrei Molchanov, has fallen 64 percent.

Oh, How Are The Mighty Fallen

"The Federation Tower, which is due to be completed by the company in 2010, will be 506 meters (1,660 feet) tall and will replace Commerzbank AG's headquarters in Frankfurt as Europe's tallest building". And this, we may like to ask ourselves, will be a monument to what, exactly?

Russia's Railways Delay Bond Issue

In another sign of the way in which the global credit strains are now biting, OAO Russian Railways, Russia's state owned rail monopoly, has said it is going to "hold off'' on selling $7 billion of 30-year bonds due to the turmoil in global financial markets. The company had planned to sell $600 million of Eurobonds by the end of 2008 to finance an upgrade in what is effectively the world's longest rail network. ING Groep NV, Barclays Capital and Morgan Stanley, the financial advisers on the loan, recommended waiting to sell the Eurobonds after they saw investor interest waning while the cost of borrowing surged. The impression that all this creates is that the global wholesale money markets are now firmly, but politely, closing their doors in Russia's face.

Back in July, Prime Minister Vladimir Putin was busying himself advocating a $525 billion overhaul of Russia's railway system, lauding the rail network as "one of the foundations of Russia's political, social, economic and cultural unity.'' Now, wasn't it Lenin who once said that Russian socialism was nationalisation plus electricity, well Vladimir Putin seems to be suggesting that the new Russian capitalism is lots of public money to support the price of Russian equities plus railways, or words to that effect.

In fact the sad reality is, after all those ambitious words have been spoken and forgotten, that the current credit crunch will probably lead OAO Russian railways to reduce spending both this year and next (and after that we'll see), both delaying and reducing the scope of the principal projected projects. Of course, the Russian govenment could fund some of the activity itself from the National Wealth Fund, but wouldn't that be just the kind of activity which S&P's are warning about? At the present time Russian Railways claim to have sufficient funds to pay off their current debt and state that they won't need to tap the state-run development bank VEB for refinancing. The rail operator does, however, have 128 billion rubles of loans and bonds outstanding, including 16 billion rubles worth due next year according to estimates, so the validity and realism of their recent statements looks like it is about to be tested.

Moody's Investors Service rates Russian Railways A3, the fourth-lowest investment grade level, while Standard & Poor's rates it one step lower at BBB+.

Russia's Manufacturing Output Falls

Obviously the credit crunch and construction slowdown is bound to work its way through to Russia's real economy one of these fine days (as we have already seen in places like Spain and the Baltics), and one early warning sign on this front could be considered to be the recent evolution in Russian industrial output. In fact Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Russia's economic growth is obviously slowing quite quickly - and evidently far more rapidly than the government anticipated - largely due to the impact of the global credit crunch, the downward movement in oil prices and investor reaction to Russia's "go it alone" attitude in international disputes.

In the present environment inflation is likely to slow quite rapidly, and in September this easing in infaltion was noted in the prices that manufacturers pay and charge, as highlighted in the VTB report: "The rate of increase in prices charged by Russian manufacturers eased for the fifth straight month to its weakest' since at least January 2003".

Oil Output Down

And just to cap it all, Russia's oil production also fell in September as companies struggled with costs and maturing fields, effectively bringing the world's second-largest crude exporter closer to its first annual drop in output since 1998. Production fell to 9.83 million barrels of crude a day (40.2 million metric tons a month), 0.4 percent less than a year earlier, according to figures released by the Energy Ministry's CDU-TEK unit.

So What Can We Expect?

Well, in broad outline I don't think the outlook has changed that much from when I wrote my last analysis two weeks ago.

As I said at that point, Russia is hardly the Baltics, so we should not expect the economy to go into a complete nosedive. A lot depends on the view you take about the future of energy prices. While the global economy is now evidently set to slow considerably - in addition to the reduction in growth rates already seen so far this year -and especially in the aftermath of the most recent bout of financial turmoil. Cleary oil prices are set to drop even further - and this will only keep pushing Russian growth down - but at some point the market will find a floor, possibly in the region of $80 a barrel. More importantly when it comes to the future of oil prices, I would not be banking on some kind of long and deep global recession. Many of those developed economies who are significantly affected by the bursting of their construction booms (and the banking issues which have gone with it) will probably have weak domestic consumer demand for some time to come, but a solid core of emerging economies may well take off again quite rapidly as we move into 2009 -and especially if energy prices drop back, and the current near panic in the financial markets settles down (people do, after all, have to put their money somewhere). So the emergent (and numerous in population terms) emerging economies should give another strong shove to what may have become a rather listless global economy. As a knock on effect this should also serve to put some life back into export dependent economies like Germany and Japan (who by and large are not reeling under the impact of the construction bust, although their banks may have been lending to people who are).

So the bottom line here, I think, is be ready for a sharp slowdown in headline Russian GDP, but don't expect to see any imminent meltdown in the Russian financial system, one way or another they have the wherewithall at this point to keep limping forward. Of course, in the longer term, well, you know......

Russia’s Crisis Spreads Right Across The Domestic Credit Market

Edward Hugh — Fri, 03 Oct 2008 07:31:00 +0000

Well, in broad outline I don't think the outlook has changed that much from when I wrote my last analysis two weeks ago.