No economic growth without crediting and high oil prices

Almaty. August 4. KazTAG - Sergey Zelepukhin. The economic results of the first half of the year look quite contradictory for Kazakhstan. Although GDP growth over this period exceeded 4%, and inflation was within the predicted corridor of 6-8%,  it is too early for the officials to beat drums  - the sources of growth raise doubts that it will remain at this level in the medium and long term, especially in the time of continuing stagnation of economy crediting by the banking sector.

Any growth prospects?

It's been seven months since the beginning of the year and it's time to sum up the results for the first half of the year. The main surprise was that the growth of Kazakhstan's economy, according to the statistics of the Ministry of National Economy (MNE), was 4.2% against 0.1% for the same period last year.

It seems that the volume of this indicator was a pleasant surprise not only for experts, but also for the Government. At least, it looked like that after the statements of the head of the Ministry of National Economy Timur Suleimenov that he made on July 18 at the Cabinet meeting. The high dynamics of GDP growth gave the Minister a reason to build ambitious plans.

"Based on the analysis, over the last five years, about 60% of GDP is formed due to an increase in economic activity in the III and IV quarters. For instance, the general GDP growth was 1% in 2016, in the first half of the year the growth was only 0.1%, and in the second half it accelerated and amounted to 1.6% compared to the same period in 2015. Therefore, in order to maintain the current dynamics of the economy, since the beginning of this year, taking into account the seasonal factors, GDP growth should not be lower than 4.1% in the third quarter and 4.3% in the fourth quarter," T. Suleimenov said.

According to the Minister, the main task of state bodies and akimats is to carry out close and coordinated work to keep the achieved growth rates of production, to ensure the target parameter of the inflation level, to create new jobs and to preserve social stability in the country.

However, the Minister failed to explain how the Government should maintain high GDP growth rates and  provide such high expectations  for Kazakhstani economy in the second half of the year, he also did not say what provided   the growth rates of Kazakhstani economy over 4% in January-June. But in vain!

Firstly, GDP growth in the first quarter looks significant only if the low base effect is taken into account, that is, if we take into account almost zero growth of the Kazakhstani economy in January-June 2016 for this comparison.

Secondly, and most importantly, the economic growth rates that have been so high in the past few years were first of all due to a rapid increase in exports during this period. According to the MNE, this indicator soared in January-June by unprecedented in recent years 37.6%, to $19 billion.

It is obvious that in the conditions of high dependence of Kazakhstani economy  it was possible only due to relatively high oil prices - in average about $50, which were formed in the first half of the year due to the agreement on oil production cut between OPEC and some oil exporting states-non members of the organization.

Several conclusions follow from this. Firstly, remarkable growth of Kazakhstan's GDP in the first half of the year is only a partial merit of the Government, limited by the performed programs.

Secondly, if it was not for the factor of significantly increased exports, experts believe that the growth rate of Kazakhstan's economy in January-June this year would be significantly lower than 4.2%, by approximately 1.5-2 times.

And the third conclusion, which logically follows the second: if oil prices do not stay at $ 50 or higher, then the Government's efforts are unlikely to fail to keep the economic growth rates at 4% or higher.

Lost decade

Another important event in the first half of the year was the fact that the Government , after 10 years that have passed since the banking system faced the crisis, finally started working on the problem of high level of non-performing loans in Kazakhstani banks.

The first and the main claimant, that needed support, was Kazkommertsbank, which only had a huge volume of non-working loans of 2.4 trillion tenge on the loan to BTA Bank, which created a huge hole in its balance sheet. However, the size of the latter was never announced by the regulator or  by Halyk Bank which bought it for 2 tenge.

Nevertheless, it is known that the Government covered the debt of BTA to Kazkom, allocating T2.1 trillion to the first one  from the Fund of Problematic Assets  plus another $ 300 billion from the funds of the FPA. In fact, after the acquisition of KKB , Halyk Bank injected into its capital 185 billion tenge. Thus, taking into account the fact that, according to the information of the regulator, Kazkommertsbank's own capital as of July 1 of this year amounted to more than 440 billion tenge, according to the roughest estimates, the hole in the balance of the Kazkom before financial inflows from the Government could reach about 2 trillion tenge, or more than $ 6 billion!

On our request to comment on the reasonableness of such generous support to KKB by the  Government, the expert, on condition of anonymity, called it "huge and unjustifiable in terms of the interests of taxpayers". "However, judging from the position of interests in preserving the stability of the banking sector, it looks quite reasonable," he added.

But now there is another problem - after the purchase of Kazkom by Halyk Bank, the financial structure appeared on the market, which takes 40% share on the volume of assets.

"In fact, a gigantic financial dominant institution has been formed in Kazakhstan with a huge share in the banking services market for all the financial indicators. It is clear that it poses serious risks to competition. And given that Halyk Bank is not only an influential financial institution, the risks for the further development of competition have doubled, " the expert said.

Moreover, in his opinion, the Government delayed with the solution of the problem of non-performing loans. Because of this, the expert believes, Kazakhstan's economy suffered "serious losses".

"What is the Government doing now? They have seriously started solving the problem of huge "bad" loans in the banking sector. But this should have been done 10 years ago, then the stagnation of banks' crediting activity would not have been so protracted. If we talk about the alternative cost to the economy from this belated decision, then it can be calculated from 1.5% to 3% of the lost GDP growth annually, approximately since 2010," he concluded.

It's hard not to agree. If the Government had begun to solve the problem of non-performing loans in 2009, that is, at the peak of the financial crisis, most banks would have been able to clear their balances of "bad" loans and overcome the credit crisis.

However, without timely assistance from the Government, banks have lost too much time, entangled in a web of non-performing loans, which, even according to the official data, taking in account the restructured loans, accumulated to about 35% of the entire loan portfolio of the banking sector.

As a result, taking into account the huge assets of the banking sector in the amount of more than 25 trillion tenge as of July 1, 2017, the real growth rates of the economy are far behind the potential ones, which negatively affect the income level of the population.
It is unclear which results the program developed by the National Bank for improvement of financial stability of the banking sector will give.  Successful implementation of this program will make an impact on how soon the banks will be able to increase credit activity and thereby contribute into economic growth.