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20:14

Slyam Akhmetov : Kazakhstan Caught in Vicious Double Trap – Low Oil Prices and Huge External Debt

13 Сентября 2016

Almaty. September 13. KazTAG – Sergey Zelepuhin. Accumulated external debt of Kazakhstan causes serious concern among experts. Even according to the official statistics, it is visible that in the future, the debt is likely to be unbearable for critically dependent on oil exports Kazakhstani economy.

Why did Kazakhstan accumulate such large external debt? How was additional external financing used in the economy? What is the link between external debt and devaluation of tenge? Why do external liabilities increase? What is the weight of the external debt per capita? Under what conditions can debt become intolerable? These and other questions we posed to Slyam Akhmetov, Candidate of Economic Sciences

- Slyam Sapargalievich, let’s begin from afar. Large external debt is accumulated in Kazakhstan. In general, for what reasons are external funds attracted?

- External funds are attracted to finance different kinds of expenses. For example, they can cover the expenses of holding different exhibitions, sport events, bailing out banks, companies; they can even be used to increase wages for certain types of government officials.

They can also be directed as an investment to economy, development and extraction of natural resources etc. However, in order to attract finance from external markets, it is necessary for demand on external money to be present in economy

- How does the demand for external funds appear? Why has it started to grow in the Kazakhstani economy?

- The demand for external funds in Kazakhstan was caused, first of all, by an increase of oil exports during the period of high oil prices. For instance, only from 2010 to 2014, when the price of the «black gold» was high, exports grew from $61,4bn. to $80,2bn., or by 30,6%. During this period the external debt also grew - from $118,2bn. to $157,4bn, or by 33,2%. Thus, every 1% increase of export contributed a 1,08% growth of external debt. Only during the aforementioned 5-year period external liabilities grew by $39,2bn!

Another source of external debt growth was the GDP. The increase of this measure was also correlated with high oil prices: from 2007 to 2014 gross domestic product was growing at the rate of 10,3-2,6%.

- What other factors could have caused the demand for external financing?

- Expenditures of the government budget. During only last 5 years they become 1,5 times larger, and transfers from the National Oil Fund into treasury reached more than 30%. Overall, the oil revenues are estimated to constitute up to 57% of budget revenues, while in GDP – more than 30%.

Of course, the increase in the demand of external financing is also caused by more factors, but the degree of influence of each is determined by proper econometric calculations.

- Let’s talk about the structure of the external debt. What does it consist of?

- According to the data of the National Bank, gross external debt – both of the private and public sector, on 1 January 2016, is $153,5bn., including direct investments – $81,9bn., or 53,3% of all external liabilities. Among direct investments, $76,1bn. – are liabilities of Kazakhstani companies to foreign direct investors.

Of the $153,5bn external debt about 45% is state borrowings and 55% – liabilities of the private sector. At the same time the share of the external debt in foreign currency in total liabilities, topped to 88,7%, and the total sum of long-term debt got to $147bn., or 95,5%.

-          For what purposes were these funds attracted into economy? Where were they directed to?

- For example, as of the beginning of the current year more than half of the external debt is attributed to such expenses as “professional, scientific and technical operations”. This category claims to have $77,6bn of the debt.

Expenses under the category of “operations of head offices of companies; consultations on issues of management” constitute $8,6bn., or 5,6%. Investment into oil pipe transportation reached $12,9bn., or 8,4%, into mining industry – $12bn., or 7,8%. To the category of “financial and insurance operations” $11,9bn., or 7,7% was directed. Into the state control and defense, and into the obligatory social benefits $11,9bn., or 7,4% was invested.

- Turns out that the bulk of the funds were not used in attempt to free the Kazakhstani economy from the  natural resources addiction.

- Unfortunately, yes. From the structure of the external debt it is clear that the government did not have any aims of diversification of the economy. As an instance, into such backward sectors as agriculture was invested only 0,2% of external funds, into manufacturing – only 4,1%, and into construction – 3,9%.

- But how reasonable is the policy of the government when most of the funds are invested into the natural resource sector?

 

- It is likely that the government did not even have an idea that the oil prices can plummet to such extent and hoped to create a “paradise” at the expense of the non-man-made goods – petrodollars, depletion of the natural resources, simple saving of the portion of it into the National Oil Fund without the necessity of laying the foundations of the modern economy.

However, such policy of long exploitation of high oil prices led to the accumulation of an immense amount of the external debt and an erosion of the natural resource development model itself.

- Where do you see the signs of this “erosion” of the natural resource development model of the Kazakhstani economy?

- The exhaustion of this model is apparent, and it is not only linked with the drop in oil prices but also, as it was shown in practice, with the needlessness for the government to create a policy of the modern diversified economy, satisfying interests of both the state, and the people.

The natural resource model had a hidden fundamental problem – it could not accept and follow the trend of world advances in hi-tech, knowledge and, overall, the creation of modern economico-political system. And from this point of view, Kazakhstani economy for many years carelessly rolled on “natural resource” slides, only giving the opportunity to enrich themselves to high officials and their surroundings. 

- What sum of the external debt falls on an average citizen of Kazakhstan?

- As of the beginning of the current year, $8684 weighs down on every Kazakhstani. For an average city family, consisting of 3 people – $26052, or in tenge – 8,7mln. For a rural family of 4-5 it is 11,7-14,6mln. tenge.

- For comparison let’s talk about the experience of the developed countries. What is the situation with external debt there?

 

- While preparing for an interview, I have looked into the public data of the central banks of Germany, Norway, China and some international financial institutions. Unfortunately, in order to understand the situation, it is impossible to avoid stating even a minimum of numbers.

So, for example, in Germany, at the end of 2015, the external debt was €4,5trln., or 149% of GDP. 70% of external debt was attracted by market institutions such as money financial institutions, financial corporations, monetary authorities, and were directed by them into economy

Another country – Norway – has an external debt, for the same year, of NOK5,2trln., or 167% of GDP. Of this debt 57,8% is from financial deposit taking corporations, 17% – other sectors, 16% – direct investments, 8,5% – state debt, and 0,7% – debt of the central bank.

 

- And what is the percentage of the external debt in GDP of our country?

- Due to the instability of the national currency, the ratio of external debt to GDP has been changing but if we take the official currency exchange rates of 1 June 2016 and GDP of 2015, the tenge ratio will be 126%.

- So it appears that having a high external debt should not be so worrying?

- Of course, it is not an entire picture. Everything depends on the quality of the state of economy and its efficient management. In fact, Germany and Norway are famous for their high organization of the economy.

- And which economic indicators show the efficiency of economy operation in these countries?

- One of such indicators is export. For example, in Germany during 2015 this measure reached €1,2trln! More importantly, more than 90% of its exports was output with high value added. For Norway this measure was NOK1,2trln in 2015. 61% was contributed by the non-resource sectors and only 39% – oil and gas.

Interesting to note is that Norway legally assigned 50% of the ownership in all of its oil sources to the state. As a result, as of 1 June 2016 the Government Pension Fund Global of Norway (former Petroleum Fund – KazTAG) has accumulated NOK7,2trln, or about $861,9bn. for a population of 5mln.

This data proves that the fundamental capability of maintaining external debt is in highly competitive economy, whereas the national economy system of Kazakhstan is essentially different from these successful economies, making it prone to high risks when issuing external debt

That means that, unlike such structured economies as Germany and Norway, the process of honoring the external obligations for Kazakhstan is critically dependent on oil sales at high prices. This is basic and apriori failing difference between the Kazakhstani economy and the national economies of successful countries

- How exactly does the organization of the national economy of Kazakhstan differ from the economies of successful countries in your point of view?

- The difference is that the long-term development of our economy was strongly tied by our government to the natural resource row, which in turn was deepened with external debt by constantly increasing it.

However, unfortunately, the government basically did not handle basic macroeconomics: high inflation, high credit rates, low productivity, uncompetitive non-resource economy, low private investments and savings, low participation in the economy by financial and banking structures including the National Bank itself.

In the economy so far, apart from the 5% unemployed, there are 30% of the so-called “self-employed” which is basically the same unemployed. Moreover, the issues with the quality of GDP, the trade balance as the guarantor of stability of tenge etc. were not solved.

- And how do these drawbacks in economic policy of the authorities reflect on capability of honoring large external debt obligations of the country?

- It led to rapid growth of the external debt being higher than growth of exports – main source in honoring the external obligations, which, by the way, also consists of almost 80% of sales of oil and other raw materials.

So, if from 2005 and 2014 all Kazakhstani exports grew 2,8 times, the external debt became 3,6 times larger. As a result, the payments of the external debt outgrew net exports, to be specific, increasing currency inflow into the economy by 3 times!

- How negatively was it reflected on other macroeconomic indicators?

- Such situation, of course, diluted the balance of payments. Its total result, due to exponential increase of the payments of the external debt over net exports became minimal or even fell into deficit. As an example, in 2007 the deficit of the balance of payments was $8,4bn., in 2009 – $4,1bn. and in 2015 – $5,8bn. Eventually such “development” through a series of major setbacks led to the devaluation of tenge against dollar.

- What were the main causes of the situation we are currently in?

- The main issues of the economic policy of the government and the National Bank are still the absence of real structural reforms in the economy and low returns on large external debt. To a large misfortune, not only did they not lead to quality changes in the economy but also did not give adequate growth of export-petroleum revenues.

Look at the structure of the usage of debt: more than half of the expenses are “professional, scientific and technical operations” – $77,6bn., of which $68,2bn. – expenses on “geological scouting and searching”

Considering drop in the oil prices, large investments from the external debt already became non-profitable – expenses are much higher under current market prices.

The policy designed for high oil prices was a fiasco. Therefore, large external debt accumulated by Kazakhstan will be a long lasting weight for the Kazakhstani economy that would absorb any financial attempts of its reorganization.

- Not so happy conclusions we have here. For a fullness of picture let’s concentrate on debt repayments. How much was repaid already?

- According to the data of the National Bank, the peak of the repayments of the external debt was during 2009. Almost $39bn. was repaid then; 2,6 times more than net exports. External debt at that time was $112,9bn.

Overall, starting from 2005 to 2015 inclusive, $321bn. was paid in total to foreign creditors! It is more than 47% of all exports during all 11 years of oil selling. But despite even this considerable size of repayments, the external debt of Kazakhstan is still a large number of $153,5bn.!

- What is the cause of it in your opinion? We did pay a colossal sum and yet the debt stays huge.

- The reason might be a pyramidal growth of obligations, i.e. when debt is repaid with the other larger debt. Unfortunately, the data of the National Bank does not give answers to that, although the document of the IMF about the statistics of the external debt (which consists of 350 pages) provides full disclosure of all types of risk related to the external obligations including refinanced, restructured, long after due time etc.

- And by how much did the conditions of serving the external debt worsen?

- The fall of the oil prices certainly worsened the state of the money economy and changed the configuration of the sources of the external debt repayments. In 2015 the main source of currency inflow – export of raw materials – plummeted to $46,3bn, or by 42%. In other words, the losses were $34bn., but non-resource economy is incapable of growing other sources of currency.

At the same time the economy loses its taxable base. According to the experts, non-oil deficit of the budget is reaching 14% of GDP, which will be financed at the expense of the external debt, Single Accumulative Pension Fund, and the National Oil Fund.

Furthermore, in this year the national welfare fund “Samruk-Kazyna” expects a 3 times profit shrinkage! That being said, according to the experts, three state holdings of development – “Samruk-Kazyna”, “KazAgro” and “Bayterek” – as of the beginning of the current year had external debts amounted to $42bn.

Surely, with such layout of things, these state holdings are counting on direct non-budget aid from the Single Accumulative Pension Fund and the National Oil Fund. According to the expert data, starting from 2007 to 2016, they received more than $33bn. from the National Oil Fund but the operations of these holdings did not yield any results on diversification of the economy.

- Cannot miss the opportunity to ask: what is the role of large commercial banks in the increase of currency capabilities of economy in debt repayments?

- Large commercial banks, inflated with funds from the National Oil Fund and the Single Accumulative Pension Fund acquired “quiet life” – became spectators, although they also previously avoided processes of the diversification of economy. Right now the number of loans issued is falling – banks are not willing to give credit to the economy and SMEs.

That being said, they receive large “air” profits from the repricing of assets due to the weakening of tenge exchange rate. However, such “values” cannot serve as indicators of the state of economy and commercial banks themselves.

At the same moment, almost double devaluation of tenge in the second half of the last year fell as a heavy weight on shoulders of the external debt borrowers who received it in foreign currency and who do not have any return from it right now. Of course, their debts doubled in tenge equally.

This resulted in significant rise of expenses of buying the foreign currency in tenge for debt repayments. The currency weight is also felt by those borrowers who have their export revenues fallen.

With such trends in economy, undoubtedly, the National Oil Fund became the main source of covering budget deficit, non-budget expenditures and external debt repayments

- And how did the situation with external debt echo to the reserves of the National Oil Fund and the National Bank?

- During the periods when the debt repayments were many times higher than net exports, a sharp decrease in the funds of both the National Oil Fund and the gold reserves (GR) of the National Bank can be observed. For instance, only in 2015 the reserves of the country shrank by $10,3bn. including the funds of the National Oil Fund – by $8,1bn., and GR of the regulator – by $2,2bn.

Basically, last year the beginning of the debt crises was managed to be held back only due to the funds from the National Oil Fund. However, a full estimation of the situation is inhibited by the Fund’s low transparency.

- If the situation would persist, for how long can we count on reserves?

 

- Such large growth of the external debt with low currency return was allowed that the financial reserves of the country, being represented by the funds of the National Oil Fund and GR of the National Bank, significantly concede to it.

For example, at the beginning of 2016 the external debt exceeded the funds of the National Oil Fund by 2,4 times, and the GR of the regulator – by 5,7 times. Therefore, if critical situations were to occur, all financial reserves of Kazakhstan would last only for 3-4 years.

- How high is the probability of the external debts becoming an environment for different financial machinations?

- Of course, in countries with “facade” democracy the usage of external debt can become a space for any kind of the abuse and embezzlement of the funds. Almost in any inefficient projects money can be redirected to accounts of high officials. In such situation external debt, without questions, becomes a long-term instrument for exhaustion of currency and natural resources of the state.

- What amounts of repayment of external obligations are expected this year?

- According to the data of the National Bank, this year Kazakhstan is obliged to pay $19,5bn., of which $14,8bn – face value, and $4,6bn. – interest. Over the course of the last 9 years it is the smallest repayment for an external obligation. It is almost 2 times smaller than payments of 2015.

- But what is the reasoning of almost 2 times less payments when the external debt is still large?

- For this question intransparent public reports of the National Bank do not provide answers. Moreover, they do not have graphs of debt repayments after 2017, there were no separate data for debt and interest repayments starting from 2005 to 2016. They also do not have the data on collateral, i.e. the info of what Kazakhstan can lose should the state of affairs worsen.

But the only apparent thing is that with the current state of the Kazakhstani economy it is not longer possible to repay the external debts as before.

- What measures can be taken by the government and the National Bank in order to avoid the worst case scenario?

- Unfortunately, now both the government and the National Bank are in zeitnot: they have no chances of improving the situation. They missed both the time and the opportunities when the oil prices were high for a considerable period. And now the economy is in vicious double trap –low oil prices and large external debt.

Now the government, as if being awakened from slumber, seeks the ways of retreat from this ambush while drawing attention on attraction of the foreign power into agriculture, renting out land to foreigners. But these attempts cause a sharp and negative backlash in society.

Without any doubt, the salvation of the Kazakhstani economy from the weight of external debt lies beyond its limits and is tied with the hopes of the sudden oil price rise.

- You said that only a rise in the oil price can save the day. Are there any premises for this?

- Oil suppliers on the world market, such as Saudi Arabia and Russia, need at least the price of $100 per barrel. Such price is also desirable for Kazakhstan and the situation in futures market says about the possibility of the increase in the value of “black gold” up to $75 and higher.

Unfortunately, the upward movement of prices occurs slowly. And this fact, experts say, is caused by a series of circumstances: lifting sanctions on Iran, progress of energy technology in extraction of shale oil and introduction of ecological constraints.

These factors not only caused temporary increase of the global supply in oil and fall of prices but also fundamentally changed the situation in the market. It is not controlled by a monopoly of OPEC any more. Therefore, the monopoly price formation is replaced by a more competitive one.

- Then, how, in your opinion, will the prices on global market behave in the future?

- According to the information being published right now, hedge-funds and other “non-commercial” speculators on New York futures markets have already exceeded the quantity of long positions for basic oil contracts similar to June 2014 when the oil price was $120.

Therefore, the resumed speculative wave – serious signal that the price of oil will be most likely falling. It is forecasted that the new oil price ceiling will be on $50-55 and price floor – at the $20 level. For the price to increase there are no premises unless there would be changes in geopolitics.

- And how successfully can Kazakhstan serve its external debts with such prices for “black gold”?

- If price ceiling stays at $50 level for long, then, without any doubt, there will be serious financial problems. Devaluation pressure on tenge will be stronger. There will be no financial opportunities for a structural reorganization of the economy. In such situation the external debt will become a weight not only for the current but also for the future generation.

- Thank you for the interview!

 


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