Kazakhstan To Analysts: Don't Worry

The following is from a Financial Times story about the recent investment ratings drop for Kazakh banks. Banks in Kazakhstan have gorged themselves on foreign borrowing for expansion in recent years, and the credit crisis is starting to affect them.

No problem, says the president:

Nursultan Nazarbayev, the president of Kazakhstan, has pledged to prevent any collapse of the country's banking sector and accused international ratings agencies of being "non-objective" after Standard & Poor's lowered its outlook on eight local banks.

"Ratings companies should realise that Kazakhstan stands firmly on its feet and will not allow a single bank to fall," Mr Nazarbayev said.

This statement is not so much interesting for itself but as it is representative of a curious mindset I've noticed over the years. It's this complete unwillingness, or perhaps inability, to accept the idea that there is any validity to information that comes from an independent-- meaning in this case, non-governmental-- source.

It's not hard to read into the above statement the idea that if the President of a country says the banks are fine, then it is so, and it is irresponsible for anyone to suggest otherwise. What the President is, or is not willing to do in response to the crisis isn't really the point. Kazakhstan has already doled out $1B to banks that have overextended themselves and is preparing to hand out more next year when the total outstanding foreign debt that the banking sector needs to repay increases to $12B. Foreign borrowing has been done at an alarming pace compared to GDP, despite the impressive growth in the economy.

In other words, no matter how fast the economy has been growing, the banking sector has been borrowing even more to continue expanding. Most of this money goes into financing the construction sector, and just about anyone who has been paying attention will tell you that Almaty is seriously overbuilt now in terms of luxury class apartment buildings. New construction projects routinely sold out before construction was finished-- in some cases, not long after it started-- and many purchases were done in bulk by small groups of people.

It's not unusual for a building to have an actual occupancy rate around 20%, with half of that going to renters, and the rest of the building unoccupied and in some cases even unfinished. Until a recent legislative change, most new apartment buildings in the city were provided as shell and core, and many purchased apartments have been left in that state, with an eye for future renovation either for rental or sale.

I'm one of many of the opinion that as long as oil production continues to increase (despite the delays at major fields like Kashagan) and oil prices remain high, those who have invested in construction will continue to have cashflow, and while new real estate projects will slow or stop and transactions will grind to a halt, prices will probably not fall much. If oil drops to some critical level-- to a point where people start considering trying to unload some of these apartments to get cash-- that's when it will hit the fan, no matter what guarantees are given about what will or will not happen to banks.

How's that for objective?