BUSINESS/FINANCE

Review for the investment summit

KAZAKHSTAN FINANCIAL MARKET: 1994 TO 1999

by Andrei Tsalyuk

Informational agency of financial markets �IRBIS�

Almaty, June 2

(Specially for THE GLOBE for the Investment Summit)

The declared economic independence of Kazakhstan actually began in November 1993, after the introduction of the national currency tenge. Five and a half years have passed since that time. A brief review of the main phases of development of the national financial market is given below.

1994 From the point of view of the formation of the market module, this year was a trial one. This was the year of experiments, brave efforts to settle the economic problems by emission, as with the help of emission the debts of the enterprises before each other were supposed to be liquidated. Unfortunately, this experiment did not succeed. It is possible to state that during 1994, Kazakhstan liquidated the consequences of inter-settlements, the main consequence being a very high inflation and a rapid devaluation of the tenge. No economic miracle occurred. Russia also greatly influenced the situation. Kazakhstan was leaving the Russian economic space, and this process was painful.

But inflation was out of the control

In 1994 the market was not market. The methods of regulating the financial circulation were mostly administrative. Sometimes these methods were rigid and unpopular with the participants. It was in this year, when the policy (the rigid monetary policy) that has been followed by the republic for five years first took shape in the consciousness of the high ranking financial managers. I think that this policy was born with the help of the IMF. But the decisive influence of IMF on the financial development of Kazakhstan would take place later. For the time being, the necessity of stabilizing the financial circulation was becoming obvious. In the hard currency sector, the obligatory sale of 50% of export revenues was actively used throughout the year. This along with other administrative measures slowed-down the collapse of tenge. But inflation was out of the control.

The notable event of this year was the emission of the first state securities (Treasury bonds). From this moment, the program of internal loans was steadily perfected and strengthened. The new source to finance the national budget deficit appeared.

1995 This year brought other approaches and some positive changes to the financial market. The realisation of the SS program and essential reduction of the devaluation rate allowed the banks to withdraw from speculating in the hard currency sector. Due to this, the share of the obligatory sale of the exporters� hard currency revenues fell to 30% (in June 1995) successfully. Later (in August 1995) this sale was abandoned. The appearance of the new financial instrument (short-term bonds of the National Bank) in the market in June 1995 also promoted stabilisation of the monetary circulation. The leading bank of the country had the interesting and effective instrument to regulate money circulating outside the bank in a market way. With the help of the bonds, the National Bank learned to �bind� free money of the banks, thus temporarily withdrawing money from circulation. This measure positively influenced both inflation and devaluation. The gradually falling rate of tenge�s devaluation resulted in a stable demand for SS by the biggest financial institutions of the country. Influenced by the growing demand, for this year the SS returns fell by a factor of 7. The methods regulating the market step by step became less administrative.

In the author�s opinion, the main directions of further development were determined by the end of 1995. The chosen model only had to be perfected. �The real economy� sector had a secondary role in this model. It is not clear whether it was planned from the very beginning (to clarify the sphere of money circulation and then deal with the industry), or whether most literate economists available in the country were first of all professional financiers. In fact, industry was forgotten.

1996 This year was the first one in which the annual results complied with the projected indices of the financial market. This was the year of rigid monetary policy. A three-year program of co-operation with IMF was signed in this year. Internal loaning was perfected. The three principles of the latter (diversification, prolongation and reducing the costs of the servicing period) were successfully realised. By the end of the year, the National Bank completely knew the method of �sterilisation� of the market by bonds liquidating sharp situations in the hard currency sector. The support of IMF allowed for the improvement of tactics of �market regulation� of the tenge�s exchange rate in respect to the world�s reserve currency. The devaluation rate notably reduced. The inflation rate became three times less, it gave the grounds to talk about control for prices. In 1996 Kazakhstan successfully placed the first emission of its sovereign Euronotes, which were accepted by the world stock market. Kazakhstan was accepted by the foreign investors.

... it seems that the local monetarists succeeded in everything

1997 This year was the most successful one for the republic. To be more accurate, this year was successful for the monetarists and for Kazakhstan�s financial market. This year had the best annual indices, control for inflation (though not by developing manufacturing, but by regulating the monetary mass). The devaluation rate was five times less (exclusively owing to the control for the monetary mass and due to the constant support of the tenge by hard currency interventions). When you look through the history of the financial market in this year, it seems that the local monetarists succeeded in everything. At last the model was realised, as there was the new source to replenish the gold and hard currency reserve � privatisation (which did not demand any interest). Thanks to money gained from privatisation, in the second half of the year, the tenge exchange rate in respect to dollar was fixed. Moreover, the government managed to conduct the popular campaign on payment of the pension debts, though this program did not settle this painful problem.

The SS sector deserves special attention. In this sector, the profitability rates fell to their historical minimum, and the market turnover confidently competed with the turnover of the hard currency market. The infrastructure of the internal debt was completely formed, and judging on the achieved results, the creators of this structure could reap the fruits of their labour. But to be just, it should be mentioned that there were some problems. The desire of the monetary authorities to make SS maximum liquid resulted in the extra �elite� shadow of the created infrastructure. Only a few of the most powerful banks of the country controlled the situation in the SS market. This sector was gradually transformed to the market of the inter-banks credits under pledged SS. The Finance Ministry and the National Bank were somehow the hostages of their Primary dealers and Primary agents, who began to stipulate their own conditions, which were not appropriate for the emitters.

This year was the year of sharp hopes of the participants of the corporate securities market of Kazakhstan. By the end of this year, Kazakhstan demonstrated to the world the ripe infrastructure of the stock market, which could accept both a big portfolio investor and stocks of strong Kazakhstan companies. The development of the country was promoted by the �oil boom�. The countries of the Caspian region drew investment interest from all over the world. Alas, the Kazakhstan program of �blue chips� was doomed to be unrealised. The governments� desire to place the state share-holdings among the strategic investors at the maximum price led to an extreme delay in the creation of the national stock market. The world financial crisis that took place in the following year made this program unprofitable under the conditions of the deepening budget crisis in the republic.

1998 The situation in the Kazakhstan financial market, to say the least, was less favourable. First of all, the condition was predetermined by the influence of the world financial crisis, and from the second half of the year � by the Russian financial collapse. The role of the reduced world prices for Kazakhstan exports, 45% of which were mineral resources and 33% � metallurgical products, was also significant. The above-mentioned factors mainly influenced the imbalance of the exports and imports. This in turn, resulted in a significant increase of the demand for US$ inside the country. Pressed by this demand and by steadily falling gold and hard currency reserves, the National Bank and the government had to triple the tenge�s devaluation rate from August 1998, though they did not give up the policy of the market regulating the rate.

... the Kazakhstan program of �blue chips� was doomed to be unrealised

The SS market was not developed properly. In the second half of the year, the Finance Ministry had to give up the idea to realise the main tasks (diversification, prolongation of the servicing period and the reduction of the costs of the servicing the state debt) in the internal loan market. In the result of the year, the interest rates of all the securities essentially raised, the debt volume increased 2.6 times owing to the specific ten-year MEAKAM with limited liquidity, and the Finance Ministry began to work only with three- and six-months securities. Nevertheless, the emitters of SS accurately paid their debts and demonstrated the weighed policy of the internal loans, rigidly abandoning the increase of the debt that was inappropriate for the budget.

But 1998 was also notable for some positive factors. It is difficult to overestimate the further influence of these factors on the Kazakhstan financial market. The most significant occurrence influencing the stability of the Kazakhstan stock market and guaranteeing its future, was establishment of the institutes of the pension funds. During this process, powerful institutional investors were established and were becoming stronger and stronger in the Kazakhstan market. By the end of 1998, the pension assets of these investors were 23.5 billion tenge. By the moment that the budget crisis sharpened, the pension funds were so strong that could take part in financing the budget deficit. The strengthened pension funds allowed for the protection of the market of internal state debt from the influence of tenge�s rapid devaluation, and in the end of the year it led to a principle transformation of the infrastructure of this sector. As of January 1, 1999 the main operator in the internal debt market were the companies� managing pension assets, but not the Kazakhstan banks.

1999 It appears that this year will be the most decisive and difficult for Kazakhstan

The Accumulating Pension Funds played a significant role supporting the Kazakhstan Euronotes in the world market. The Russian crisis let to a significant fall of the national sovereign debt. Money invested in this type of securities to defend the population�s pension assets from devaluation, led to a reduction of the return of the Kazakhstan Euronotes from 22-28% to 15-17%/year, and in the beginning of 1999 � to 11-14%/year.

1999 It appears that this year will be the most decisive and difficult for Kazakhstan. In this year, the republic has to reimburse the largest amount of the foreign loans. The conjuncture of the world raw materials markets does not demonstrate any principal improvements. The potential of the privatisation has ceased, and Kazakhstan will feel it in this year.

In the beginning of April, the eight-month �round defence� of tenge was broken: and a free-floating exchange rate was introduced in the country. As a result, the devaluation rate is close to the level of 1994. The government is looking for a way-out from the current situation. If the government succeeds, it may stir up the market. It is obvious today that Kazakhstan will not be able to overcome the crisis without an urgent revival of the local industry. It is also obvious, that rigid monetarism has become obsolete and it is necessary to raise the monetarisation level of the economy. Unlike 1994, the measures taken in this year will prove a more serious and effective approach to the problem. The campaign on attracting the local institutional investors and general population to the Republic�s industry is being realised. Taking into consideration the latest information, this campaign was initiated by the President, which raises some hopes. The pension funds are psychologically ready to invest money and bonds into the most progressive Kazakhstan companies, while the latter�s management have begun to realise the advantages of such working capital.

Kazakhstan seems to be changing.

Main macroeconomic indices and main parameters of the Kazakhstan financial market

Note:

- the author does not have data, or the available information is not comparable;

* as on April 1, 1999, the later information is unavailable.

The table is prepared on the basis of the official statistics using the database of KASE and �IRBIS� agency.

The War of Corporations in Kazakhstan�s mining industry

Gulbanu ABENOVA

ALMATY, June 2 (THE GLOBE)

�The gist of the conflict lies in the corporations� desire to acquire the markets�, the leaders of one of the mining enterprises stated in Almaty on June 1.

The representatives of the ELROVO consortium accuse SSGPO of trying to suppress their consortium, which is a weaker participant in the market.

The two entities are arguing about the �Atansor� mine with its estimated deposit of 37 mln tons of iron ore, while SSGPO�s deposit comprises 3 bln tons of iron ore.

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