Kazakhstan's banking system remains weak, S&P reports

Almaty. September 13. Silkroadnews – Kazakhstan's banking system remains weak, S&P Global Ratings says.

«In our view Kazakhstan's banking system remains weak. We expect the growth of bad loans (non-performing loans - NPL) this year, as the Tenge devaluation last year affected the ability of some borrowers to service loans in foreign currency. We also believe, the official statistics of problem loans (almost 8% of total loans in July 2016) underestimated the credit risk in the sector», the information released on Monday states.

As S&P experts explain, the text says, such a situation may be caused by the fact that some banks have created special entities (special purpose vehicles – SPVs) to transfer their bad debts to shown in their nominal values. As soon as you make the necessary adjustments the real level of bad loans is likely to be much higher.

«We also note the high level of dollarization of deposits of residents in the economy of Kazakhstan, which restrains the monetary policy flexibility. Despite the share of foreign currency deposits in total deposits volume has recently decreased to less than 60% from a peak of 70% at the end of last year, its level remains high so far. Deposits of commercial banks at the National Bank of RK, denominated in foreign currencies accounted for about a half of the international reserves of the National Bank of Kazakhstan at the end of 2015», stated the release.

In addition, the National Bank of Kazakhstan conducts around a $4 billion (almost 15% of international reserves) «currency swap» operations with Kazakhstani banks, which is, in fact, nothing else but moving the banks' external assets into the National Bank of the Republic of Kazakhstan.

According to S&P analysts, the foreign economic indicators of Kazakhstan remain under pressure, though they are still relatively strong and stand for a factor supporting the ratings. In particular, in 2015 a five-year period of surpluses (making 2% of GDP in average) was followed by the current account positioned with a 3.2% of GDP deficit.

«We expect the deficit to reach its peak of 4% of GDP in 2016 to be then followed by a gradual decline along with oil prices recovery and operation of the Kashagan field. In the short term, the current account will be supported by reduction in imports as consumption level is getting reduced due to significant weakening of Tenge in the last year», the text underlines.

The S&P analysts also say the degree of the Kazakhstani National Bank's commitment to the policy declared is not that clear, which is also true for the Bank's ability to retain the inflation within the restrictions set.

«We believe the National Bank may experience political pressure, what has been demonstrated by a number of examples over the past year, including, for example, the acquisition by the central bank of a stake in «KazMunayGas» and compensation payments on deposits in the national currency after Tenge devaluation in 2015», the rating agency officials say.