Shockwaves to rock Central Asia?
The global financial crisis that has steadily evolved over the last twelve months to erupt in a full-blown crash over the past days will have consequences around the world. Russia’s stockmarket was forcibly closed until Friday, and some analysts are already predicting some sort of re-run of the 1998 crisis that also took its toll in Central Asia. Meanwhile, banks worldwide are getting into liquidity problems and severely restrict lending. What are the implications for the region?
With its relatively developed banking sector, Kazakhstan of course first comes to mind. Although the government is trying to calm observers by saying that the “credit crunch” has been weathered mostly last year, the sheer speed at which the bad news are coming out the wires these days makes this a highly questionable statement. Russia’s Prime Minister Putin said several days ago that Russia was a “safe haven” during the global turmoil only for President Medvedev to today attest a “financial crisis” was happening.
Kazakhstan’s banks are highly leveraged, most of them having taken out loans abroad with other big European and American banks. A lot of this debt is short-term and usually has to get rolled over at the end of a lending cycle, for many loans this happens annually. Again, a lot of Russia’s external private sector debt becomes due for refinancing later this year, and it does not take a finance guru to predict that the new terms (massively increased borrowing costs due to shortage of capital) will bring down large financial institutions in Moscow. The same goes for Astana and Almaty. If there is already trouble with idle construction sites as we speak, expect this problem to become much bigger when loan financing becomes prohibitively expensive while at the same the hunger for real estate is flattening.
Then there is of course the oil price that has seen a massive decline over the past weeks. Kazakhstan (and Turkmenistan) is likely to suffer some setback in tax revenue, yet of course from absolute record levels in July. If a big market collapse was to hit the country, the government may be tempted to use saved oil windfalls from the National Fund to bail out financial institutions and/or to intervene in the currency market should a run on the tenge set in.
The stock exchange (KASE) is also being impacted by the bad news from Russia, as unfortunately:
“(t)here is no decoupling right now between Russian and Kazakh indexes, because a significant part of the investor base is funds with CIS or CEE mandates, who start to reduce their Kazakh holdings when they see significant problems in Russia,” says (Rencap’s head of Central Asia research) Salimov. “This happens even though the economic dynamics and growth prospects in Kazakhstan and Russia are very different.”
The other Central Asian countries are less interconnected with the international financial infrastructure, although it doesn’t take a lot of imagination to see Bishkek’s construction boom grinding to a halt as it is to a large extent financed by Kazakh banks. A global economic slowdown, something that is almost certain to come out of current market conditions, will of course affect all countries to some extent, although the more autarkic Uzbekistan and Turkmenistan seem less exposed.
In general, big foreign direct investment projects in the whole region may come under scrutiny again or may get delayed due to shortage of funding and lower risk appetite. Only time will tell whether we will see a decrease in FDI across the region in 2009.
Except for Kazakhstan, where more trouble isn’t hard to imagine, the story is less clear and less supported by news for the other Central Asian countries. Watch this space.
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