Kazakhstan on Road to Recovery, But Banking System Still Weak

Higher oil prices and a large, timely stimulus program have aided recovery

Banks must address the rising stock of nonperforming loans

Fiscal stimulus will need to be gradually withdrawn

In its annual health check of the oil-rich Central Asian economy, the IMF projects that the economy will grow by 4 percent in 2010, mainly driven by higher exports, increasing commodity prices, and foreign direct investment. But Kazakhstan must resolve bank weaknesses exposed by the crisis, the IMF stressed.

“A comprehensive strategy to reduce nonperforming loans is urgent and should be accompanied by a full assessment of recapitalization needs for systemically important banks,” the IMF assessment said, noting that the country would also need to upgrade the banking system’s regulatory and supervisory frameworks.

Rapid growth, then sudden stop

Kazakhstan, the largest landlocked country in the world, is the site of the most significant new oil discovery in recent years. The oil sector dominates the economy, accounting for one-fourth of GDP, 60 percent of total exports, and 40 percent of total budget revenues. Major foreign investment in this sector helped fuel strong GDP growth between 2000 and 2007, averaging about 10 percent a year.

At the same time the economy was experiencing rapid growth, Kazakhstani banks borrowed heavily from abroad, amassing external debt amounting to roughly 44 percent of GDP to fund a rapid expansion of credit, largely concentrated in construction and real estate. When the global financial crisis hit and capital stopped flowing into the country, credit growth ground to a halt, and property prices slumped. With oil prices plummeting, Kazakhstan faced a drop in the value of its exports from $76.4 billion in 2008 to $48.2 billion in 2009.

The combination of weak economic growth, currency-induced credit exposure, and increased uncertainty led to significant difficulties in the banking system. Four Kazakhstani banks were forced to restructure their external obligations, and nonperforming loans—that is, loans that are either in default or close to it—began to rise sharply.

Swift crisis response

Owing to the government’s ample resources and low public debt, the authorities were able to respond swiftly to the crisis. Drawing upon savings in the National Oil Fund—a nest egg established by the government in 2001 to save oil income for future generations and to reduce dependency on the budget when shocks arise—the authorities...