Kazakhstan will set up a $6 billion distressed asset fund this year to buy up bad loans from its banks and help the sector cope with the global credit crisis, the finance minister said on Wednesday. The liquidity squeeze has left many banks in Central Asia's biggest economy with limited access to foreign borrowing and ended a double digit growth spurt in the oil-rich economy.
Speaking at a banking conference, Finance Minister Bolat Zhamishev said the Kazakh authorities were in talks with foreign banks with similar experience of setting up buyout funds. "Its creation is planned for this year," he said, adding the fund would also issue securities as part of the plan. "If we talk about sources for its financing, then we can say that it will be $1 billion in budget money and $5 billion from the market," he said without naming its potential investors.
While praising Kazakhstan for its proactive approach, market watchers were cautious about the plan's implementation. Reflecting these worries, the cost of insuring the debt of Kazakh banks continued to trade around record levels in London.
Credit default swaps for No 2 bank Kazkommerts widened to 1,250 basis points compared to 1,200 on Monday. Any CDS price above 1,000 is usually seen as pricing in default. "I guess many are wondering how the authorities think they are going to get this done at a reasonable price in such an environment," said Ali Al-Eyd, an economist at Citigroup.
"Although proactive ... it is also a recognition that banking sector problems are or could be much larger than anticipated. All of this could end up on the government's books in one way or another." Kazakh banks have said widening swaps and falling share prices were in line with broader negative market trends.
"Spreads are rising for everyone," said Roman Solodchenko, chief executive of BTA Bank. "It is linked to the growing panic on the international financial markets." The global liquidity squeeze has halted large-scale market borrowing by most Kazakh banks, ending a period of rapid credit expansion in Central Asia's biggest oil producing nation. At the conference, Zhamishev said the fund would focus only on "distressed" loans that can potentially be repaid, leaving the banks to deal with non-performing loans on their own. "We don't mean entirely hopeless assets," he said.
He said the fund would also pool assets into bonds and some of the tranches would be partially guaranteed by the state. "It's a mechanism which is orientated towards foreign investors and foreign markets," he said. Economists see more non-performing loans over coming months and a further decline in the quality of bank loan books.
"Obviously it would have been better if they (Kazakhs) did not need such a fund in the first place," Christian Kuehner, rating advisory specialist at UBS, told reporters. "But it's very positive that the government is not in denial and is addressing this problem."
As market uncertainty widened, the government has slashed its 2008 economic growth forecast to 5.3 percent after years of average 10 percent growth fuelled by booming commodity prices. But, with oil accounting for 60 percent of all exports, high global prices are seen offsetting the impact of financial volatility on Kazakhstan's highly leveraged economy.
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