Saturday, December 22, 2007

Kazakhstan’s Credit Crisis

Source: Kazakhstan's Bank Lending Frozen in Subprime Squeeze (Bloomberg)

Kazakhstan is experiencing a credit crisis as much of the $40 billion that Western Investors have brought into the country is not evaporating. As one analyst notes, international credit markets crumbled after the fallout in the United States subprime mortgage market.

Quantifying the problem, Kazakhstan banks' sales of Eurobonds and syndicated loans, dropped from $8.6 billion, in the first eight months of 2007, to $300 million in the following three months. Other metrics show a similar economic problem. Not all analysts and players are pessimistic about the present and future. The chairman and principal owner of Kazakhstan's second-biggest financial institution, Ablyazov believes “that some seven to eight months will pass, and we will cope with the situation.''

After the discovery of the Kashagan oil field in 2000, Foreign investment increased dramatically. The new wealth is transforming what had been an “economic backwater.” To fund consumer and business demand for credit, Kazakhstan's banks jumped into international markets. As a result of the influx of foreign money, the country's banks grew their assets 10-fold since 2002, to $94.7 billion as of Nov. 1.

However, the aforementioned credit crisis has caused a reversal. From August through October, $6.8 billion in foreign currency flowed out of the country—28 percent of the central bank's total. To combat the recent problems, the government pledged to support the lenders' needs with up to $4 billion on Nov. 14. Many analysis do not see a recession in Kazakhstan’s future, rather they see more moderate or flat growth in the new future.

Questions for discussion: (1) What effect will the Government’s pledge have on the economy; (2) How deep and long-lasting will the credit crisis be in Kazakhstan?

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