speeches

Alternative sources of funding for Kazakhstan's economic growth in changing world financial markets

EBRD President Thomas Mirow

Kazakhstan Foreign Investors' Council 21st Plenary session Kostanai, 12 June 2009

President, Prime Minister, Ladies and Gentlemen,

Thank you for your warm welcome, Mr President, and for the opportunity to take the floor today. I would also like to thank all participants of this 21st plenary session of the Foreign Investors’ Council for their presence which is a strong demonstration of their commitment to Kazakhstan.

Allow me in this spirit to explore the important issue on today’s agenda: In the wake of the deep global financial crisis, how to reconnect to existing funding sources and how to find alternative sources of finance?

With the crisis many traditional sources of financing have dried-up: First, the crisis originated in countries whose financial institutions were traditionally the main funding sources. Second, the crisis exposed vulnerabilities in the recipient countries.

To overcome the crisis we will therefore have to correct misdevelopments in both source and recipient countries. We welcome Kazakhstan’s efforts to draw conclusions from the crisis and lay the foundations for more sustainable and diversified growth of both its financial system and the real economy.

[Origins of foreign funding]

Let us first take a look at the current stock of foreign capital in Kazakhstan. Foreign direct investment (FDI) is already quite diversified. Since the beginning of the 1990s, Kazakhstan has managed to attract about $90 billion in FDI. Almost 40 per cent of this cumulative FDI, according to official figures, has gone into the hydrocarbon and other commodity sectors. Although the majority came from the US and Europe, large-scale investments from countries closer to Kazakhstan –Russia, China and South Korea – have been prominent as well.

FDI flows are usually quite stable and resilient. Investors have a long term vision and are resilient to short term volatility. Also during the current crisis FDI inflows to Kazakhstan have so far been quite stable.

Meanwhile, cross-border foreign bank lending to Kazakhstan virtually dried up towards the end of 2007. But banks that are integrated into strong multinational banking groups have been able to call on their parent banks for financial support. This shows how important it is to provide the conditions for foreign banks to engage in a country on a long term basis.

The question now is how to ensure that bank lending to Kazakhstan picks up again and to ensure that bank lending contributes to the economic diversification in a stable way?

[Higher attractiveness through improvements in the financial sector]

A first step is a comprehensive solution to the problems in the banking sector. This includes obtaining a better picture of the quality of banks’ loan portfolios, the recapitalisation of banks, if and to the extent necessary, and the development of sound business plans.

Second, the Kazakh banking system needs to develop in a more sustainable manner. For that goal it is key to strengthen domestic financing, particularly tenge deposits. The loan-to-deposit ratios will have to be reduced where necessary. The subsequent reduction of foreign currency lending will lessen the exposure to exchange rate fluctuations. Initiatives to facilitate the refinancing of foreign currency mortgage and SME loans into tenge would be welcomed in this context.

Third, the focus should be on the further development of core competencies as well as specialised sector-oriented expertise within local banks. In the past a considerable amount of bank loans has been extended without any external financial audits. Lenders relied too much on collateral such as real estate, the value of which may fluctuate greatly.

Financial analysis and regard for borrowers’ cash flows was often insufficient. As a result the handling of bad or underperforming assets is currently a pressing issue. Looking ahead, improvements of banks’ lending and risk management strategies to a more cash flow-oriented approach will be crucial.

We therefore support attempts to create conditions for best practice transfer, training and input from international experts into private or public financial institutions. We welcome the cooperation with international banking groups and consulting companies and efforts to make best use of their restructuring skills.

Fourth, a modern, competitive economy needs an adequate legal framework under which procedures for insolvency or bankruptcy are as important as swift, transparent and independent court proceedings. This will enable and speed up the necessary restructuring of troubled companies and open the doors for more M&A activity and involvement of private equity firms as well as allow banks to restore lending.

[Higher attractiveness through strengthened domestic market and new approaches]

Equally important is the growth and deepening of the domestic capital market. Financial services including leasing, insurance and pension funds are still at an early stage of development in Kazakhstan. The development of the pension market can be an important investment resource for the economy, while leasing can augment bank financing to SMEs with better credit risk and may help funding the wider economy. Sound pension fund management can play an important role in the development of domestic capital markets.

Globally, private equity funds have emerged as an important source of long term capital. Kazakhstan already has a number of private equity funds, run by capable and talented managers, but there is certainly room for more. To that end, the EBRD has invested in or together with a number of private equity funds in Kazakhstan, including our latest $100 million joint venture with Samruk-Kazyna.

Sovereign wealth funds as source of investment capital have been growing in importance. When turning to sovereign wealth funds one must ensure that the investment fosters, the principles of the market economy, generates local jobs, utilises best technology and serves, among other things, to protect the environment.

We strongly welcome innovation and the quest for new solutions, but we equally strongly want to encourage you not to abandon so-called “traditional” ways of financing, but rather diversify sources of funding, make good use of all available financial instruments including more equity, in order to maximise value for the economy.

Going one step further into still little explored territory we see huge potential for Kazakhstan to attract investors by implementing regulation to support investment based on the mechanisms of the Kyoto Protocol. We welcome your country’s entry into the treaty. We understand that Kazakhstan will now undertake the steps to become eligible for hosting projects under the protocol. This will allow Kazakh companies to claim carbon credits for sustainable energy projects and Kazakhstan to take its place on the global carbon market.

Ladies and Gentlemen,

The EBRD and Kazakhstan have always enjoyed a very close relationship which also finds its expression in the Foreign Investors’ Council of which our Bank was a co-founder. Let me assure you that in today’s more testing times we remain your committed long term partner. We shall continue to work together both with Kazakh partners and international investors to develop the alternatives outlined today.

Thank you for your attention.