MINISTRY OF EDUCATION AND SCIENCE OF THE REPUBLIC OF KAZAKHSTAN KAZAKH-BRITISH TECHNICAL UNIVERSITY FINANCE & ECONOMICS FACULTY Department of Finance and Accounting APPROVED BY Dean of Finance &Economics Faculty, Doctor in Economics, Associate Professor _____________ G.T. Abdrakhmanova BACHELOR’S DIPLOMA THESIS Thesis title: «Global financial crisis and its influence on Kazakhstan» Major: 5B050900 «Finance» Developed by A.K.Pstebayeva Bachelor Thesis Supervisor (MSc, Senior Lecturer of Finance & Accounting Department) A.N.Mamyrbayev Chair of «Finance and Accounting Department», Doctor in Economics, Associate Professor G.T. Abdrakhmanova Аlmaty 2012
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MINISTRY OF EDUCATION AND SCIENCE
OF THE REPUBLIC OF KAZAKHSTAN
KAZAKH-BRITISH TECHNICAL UNIVERSITY
FINANCE & ECONOMICS FACULTY
Department of Finance and Accounting
APPROVED BY
Dean of Finance &Economics Faculty,
Doctor in Economics, Associate Professor
_____________ G.T. Abdrakhmanova
BACHELOR’S DIPLOMA THESIS
Thesis title: «Global financial crisis and its influence on
Kazakhstan»
Major: 5B050900 «Finance»
Developed by A.K.Pstebayeva
Bachelor Thesis Supervisor
(MSc, Senior Lecturer of
Finance & Accounting Department) A.N.Mamyrbayev
Chair of «Finance and Accounting Department»,
Doctor in Economics, Associate Professor G.T. Abdrakhmanova
Аlmaty 2012
TABLE OF CONTENT
INTRODUCTION………………………………………………………………...3
PART I GLOBAL FINANCIAL CRISIS AND ITS PECULARITIES
1.1 Theoretical framework for the analysis of global financial crisis:
Defining and identifying financial crisis…………………………………....5
1.2 The world financial crisis during 2007-2012: causes and consequences…..11
PART II FINANCIAL CRISIS IN KAZAKHSTAN
2.1 Influence of global financial crisis on Kazakh economy…………………...21
2.2 Anti-crisis measures conducted by National Bank of Kazakhstan during the
crisis………………………………………………………………………....35
PART III CRISIS MANAGEMENT AS A NEW MANAGEMENT PARADIG
3.1 World practice on anti-crisis measures conducted during the global financial
crisis……………………………………………………………………………….49
3.2 Ways of improvement of anti-crisis packages conducted by central banks…..54
CONCLUSION………………………………………………………………………………......62
BIBLIOGRAPHY………………………………………………………………………………..64
APPENDICES
INTRODUCTION
Global Financial Crisis of 2007-2012 has been the worst since the Great
Depression in the 1930s. The financial crisis has had a profound effect, much more
than that anticipated by many. The national borders have been breached and the
ramifications are still being felt far from the epicenter. Although the global
economy is recovering, the confidence in the markets is still weak as market
participants are looking for a direction which is by no means straight forward.
The financial crisis was the event which was not supposed to happen, but it did.
Few economists thought that the U.S. economy would ever experience a systemic
financial crisis again or that it would turn into a global crisis. But, the crisis, which
began in August of 2007, developed into the worst crisis. It has been
unprecedented in its depth and scope. The recession in the United States spread
around the world. It appeared for a time that a new Great Depression was going to
occur, but central banks engaged in extraordinary efforts to stabilize the economy.
As is the common perception, government regulations follow the crisis. Regulatory
bodies analyze the events specific to the crisis and try to bring down formal
regulations which would avoid a similar crisis in the future. After witnessing
trillions of dollars of losses, high unemployment rates and company bankruptcies,
national governments are pressurized and are expected to take immediate and
concrete actions that restore the market confidence. But often, regulatory bodies
come out with regulations which are not the optimal solution. These regulations
can be more than required or sometimes, under political pressure emphasize on
matters that are not the actual causes of the debacle.
The aim of this Bachelor Thesis is to understand the financial crisis, its causes
and the regulatory policies that have come up to avoid a next financial crisis in
Kazakhstan. There has been lot of discussion on the miscreants that spawned the
crisis. This thesis tries to understand the new regulations that have come up in the
world. Also, it tries to identify the similarities and differences in the approaches of
regulatory bodies in different regions. During the research following tasks were
defined:
Developing an understanding of the world financial crisis (understanding the
views of different authors);
Identifying main factors behind the crisis;
Analyzing the impact of financial crisis on world economy, in particular,
Kazakh economy;
Understanding the regulatory changes during the world financial crisis;
Comparison and analysis of regulatory changes;
Providing views on the effectiveness of regulations in improving the current
situation.
This work uses a lot of information available from various books on financial
crisis, conferences and panel discussions, blogs and newspaper articles, statistical
data, websites of central banks and various regulatory bodies.
The Thesis is structured as follows:
Part I provides a theoretical framework for the analysis of world financial crisis
and describes origins of the contemporary financial crisis, disputes reasons and
tries to find out explanations of some questions, such as causality of the crisis, role
and regulation of the systemic risk, etc.
Part II is devoted to the analysis of negative effects on Kazakh economy
including national economy, industrial sector and banking system. The chapter
contains also description of the most important regulatory changes in Kazakhstan.
Part III concludes the Thesis with some after-crisis-to-do and proposals.
PART I GLOBAL FINANCIAL CRISIS AND ITS PECULARITIES
1.1 Theoretical framework for the analysis of global financial crisis:
Defining and identifying financial crisis
The crises in the world economy are supposed to be logical, inevitable, and
periodic. By the way the most are almost always unexpected, in spite of the
warning signs and prevention of persistent analysts and economists. That is what
happened with the current global financial and economic crisis.
When selecting a particular object of study, the authors try to reveal the
traditional notion of a phenomenon on the basis of its internal contents. According
to the glossary crisis − a sharp abrupt fracture, dislocation of the economic life,
which leads to a reduction in the production of goods, increased unemployment,
deterioration of the situation of workers. In a large economic dictionary noted that
"the financial crisis − the deep frustration of the state financial system, followed by
inflation, the volatility of the securities exchange, manifested in the sharp disparity
of income to the expenditure budget, instability and collapse of the exchange rate
of the national currency, mutual non-payments of economic entities, currency
mismatch in circulation requirements of the law of money circulation ".
Philosophical Dictionary interprets "financial crisis" as "the emergence of
conflicts and their resolution, and at the same time, the emergence of new
contradictions", it should be noted that every crisis is a necessary aspect and stage
of development, when the contradictions of the system deteriorated sharply to the
brink of collapse, which allows to detect and in their awareness of their historical
subjects of action, this collapse, and clears the way for updating or eliminating
system for the jump, achieving a new quality system or the transition to a
qualitatively new system, thus accelerating the movement of history, the pace of
historical development. Referred to the financial crisis is quite a variety of
situations in which some financial companies or assets (for example, shares or
bonds) dramatically lose a substantial part of its value. It is clear that the financial
crisis first hit the financial sector. However, due to the fact that the real sector is
closely related to finance, in the end such crises are reflected in all sectors of the
economy and lead to a decline in production, increased unemployment, lower
living standards, etc.
More common definition on financial crisis used in literature is a situation in
which the value of financial institutions or assets drops rapidly. A financial crisis is
often associated with a panic or a run on the banks, in which investors sell off
assets or withdraw money from savings accounts with the expectation that the
value of those assets will drop if they remain at a financial institution. A financial
crisis can come as a result of institutions or assets being overvalued, and can be
exacerbated by investor behavior. A rapid string of sell offs can further result in
lower asset prices or more savings withdrawals. If left unchecked, the crisis can
cause the economy to go into a recession or depression.
According to definition proposed by Frederic S. Mishkin, “A financial crisis is
a disruption to financial markets in which adverse selection and moral hazard
problems become much worse, so that financial markets are unable to efficiently
channel funds to those who have the most productive investment opportunities. A
financial crisis thus results in the inability of financial markets to function
efficiently, which leads to a sharp contraction in economic activity”.
By the way, up until recently, views of financial crises in the literature have
split into two polar camps, those associated with monetarists versus a more eclectic
view put forward by Charles Kindleberger and Hyman Minsky. Monetarists
beginning with Friedman and Schwartz (1963) have linked financial crises with
banking panics. They stress the importance of banking panics because they view
them as a major source of contractions in the money supply which, in turn, have
lead to severe contractions in aggregate economic activity in the United States.
Monetarists do not view as real financial crises events in which, despite a sharp
decline in asset prices and a rise in business failures, there is no potential for a
banking panic and a resulting sharp decline in the money supply. Indeed, Schwartz
(1986) characterizes these situations as "pseudo financial crises". Government
intervention in a pseudo-financial crisis is unnecessary and can indeed be harmful
since it leads to a decrease in economic efficiency because firms that deserve to
fail are bailed out or because it results in excessive money growth that stimulates
inflation.
An opposite view of financial crises is outlined by Kindleberger (1978) and
Minsky (1972) who have a much broader definition of what constitutes a real
financial crisis than monetarists. In their view, financial crises either involve sharp
declines in asset prices, failures of large financial and nonfinancial firms,
deflations or disinflations, disruptions in foreign exchange markets, or some
combination of all of these. Since they perceive any of these disturbances as
having potential serious consequences for the aggregate economy, they advocate a
much expanded role for government intervention when a financial crisis, broadly
defined, occurs. One problem with the Kindleberger-Minsky view of financial
crises is that it does not supply a rigorous theory of what characterizes a financial
crisis, and it thus lends itself to being used too broadly as a justification for
government interventions that might not be beneficial for the economy. Indeed,
this is the basis of Schwartz's (1986) attack on the Kindleberger-Minsky view. On
the other hand, the monetarist view of financial crises is extremely narrow because
it only focuses on bank panics and their affect on the money supply.
The President of the European Central Bank− Mr. Jean Claude Trichet opines
that “financial crises share some commonalities. In particular, crises are associated
with the emergence of euphoria and complacency in financial markets, typically
supported by rapid credit growth and a growing belief that new concepts like
financial innovation or technological advances have rendered old limits on
economic performance obsolete”.
At the same time Trichet acknowledges the fact that each crisis is also unique.
Every crisis has its own characteristics, which make it different from the previous
ones. In order to avoid the next crisis it is essential to understand the causes and
mechanisms behind the current crisis. Every crisis takes its own course in the
financial system and affects specific sectors more than others.
Crisis, being the moment of dialectic development represents process, and as
that, passes some stages of development, namely:
- Stage of formation of crisis;
- Stage of development of crisis till a full maturity;
- Stage of a full maturity of crisis;
- Stage of permission of crisis.
For emergence of crisis the special aggravation of contradictions - not initial,
initial for this system, and not maximum is necessary. Definition of degree of this
aggravation is connected with the concept a measure of relative independence of
the parties of a contradiction, that is that limit of an aggravation of contradictions
behind which crisis begins.
This degree of an aggravation of contradictions is reached at a stage of
formation of crisis. This stage covers the period from emergence of the first
sporadic crisis moments in development of the phenomenon, process and system to
such level of an aggravation of contradictions when there is a possibility of a
quantum leap in the presence of especially favorable circumstances, conditions. In
dialectics necessary and casual accident even more strongly than need, however,
the new reality is already possible, and, means, crisis became, is the fact and a
development.
At the second stage they become crisis develops before complete maturing,
there is a process of further isolation of contrasts, aggravations of dialectic
contradictions, need declares everything itself more persistently, generating more
and more the corresponding accidents, transformation of possibility into reality
becomes more and more necessary.
The third stage - a stage of a full maturity of crisis. The unity of finally stood
apart parties of a contradiction is supported violently, the antagonism reached
extreme development, the old qualitative condition practically reached the top
border of the quantitative measure (the internal limit of system is almost reached),
transition to new quality is objectively possible at any time in the presence of a
maturity of a subjective factor, transformation of possibility of a quantum leap into
reality became crucial need of development.
The fourth stage - a stage of permission of crisis or the negative destructive
side of the crisis. In crisis as its last stage, enters not jump as a whole which
includes not only destruction old, but also creation new but only the negative
destructive part of jump.
It is often said that those who do not remember the past are doomed to repeat
it. With economics it's no different, considering the world has experienced dozens
of crashes and recessions, undoubtedly caused by acquisitive traders and
lawmakers with few memories of the past. So its important review past
crashes−hopefully new management won't repeat them. But during the assessment
of views of crises and their reasons it is necessary to note that they changed in time
together with change of the most social and economic reality. Taking into account
it the point of view of a number of the Russian economists who allocate three
stages in change of views of recurrence in the crisis phenomena is worthy.
The first stage covers the period since the beginning of the XVIII century to the
middle of the 30th of the XX century when judgments prevailed that economic
crises or in general are impossible under capitalism (J. S.Mill, D. Ricardo), or they
carry, only casual character and system of free competition is capable to overcome
independently them (Sismondi, R. Rodbertus, K.Kautsky).
The second stage covers the period from the middle of the 30th to the middle
of the 60th of the XX century. Allocation of this period is connected with Keynes
and first of all with his conclusion that economic crises (the depression is more
exact, stagnation) are inevitable in the conditions of classical capitalism and follow
from the nature of the market inherent in it. Keynes among the western economists
directly declared to one of the first that the capitalist market includes various
manifestations of monopolist and why the price and a salary are nonflexible. As
essentially necessary means of smoothing of problems of crisis and unemployment
Keynes put forward idea of ensuring the state intervention in economy with a view
of stimulation of effective cumulative demand. In research of a factor of recurrence
it is necessary to carry to his merits also the theory of the animator developed by it
which in the subsequent began to be used widely in the analysis of the reasons of
recurrence.
The third stage in research of the reasons of crises is the period from the
middle of the 60th so far. During this period, first, it began to be given particular
attention to differentiation of the internal and external reasons of recurrence of
market economy, and to internal factors it began to be paid primary attention.
Secondly, the position of a number of experts according to which the state in
the developed countries not always aspires to anti-recessionary regulation, to
smoothing of cyclic fluctuations and to stabilization of economic balance was
defined, and carries out quite often so-called about cyclic policy, i.e. provokes and
supports recurrence.
Researches of the nature of crisis in the conditions of state regulation of
economy generated a number of new views and concepts on this problem. Among
them: concepts of «an equilibrium business cycle» and «a political business cycle».
The first reflects development of ideas of monetarism. According to this
concept the state along with many functions inherent in it carries out a role of a
peculiar generator of monetary "shocks" which deduce economic system from an
equilibrium state and thus sustain cyclic fluctuations in public reproduction.
In 70 — the 80th this concept was actively developed by representatives of the
theory of rational expectations. If monetarists consider that the state can provoke a
cycle, using insufficient awareness of people on the true contents and the purposes
of the various directions of state economic policy, supporters of the theory of
rational expectations proceed in the matter from opposite reasons. They consider
that businessmen and the population learned to estimate and distinguish true
motives of decisions of state authorities thanks to occurring information revolution
and can react in due time every time to them in compliance with the benefit. As a
result of the purpose of a state policy remain unrealized, and recession or lifting
accepts more strongly pronounced character.
The second concept (“a political business cycle”) is based that dependence
between an unemployment rate and a rate of inflation is defined by Phillips Curve,
i.e. there is an inverse relationship between two variables: with the low rate of
unemployment, the prices rise rapidly. His supporters believe that the economic
situation within the country essentially influences popularity of ruling party. As the
main economic indicators to which the population reacts, rates of inflation and
standard of unemployment are allocated: than below their levels, other things being
equal more voices will be submitted by that on upcoming elections for ruling party
or the president.
The literature has used different criteria to identify crisis episodes, many of
which fit directly or indirectly in parts of the definition proposed above. A full and
uncontroversial identification is difficult, since it involves a counter-factual
exercise: what would have happened in each particular episode if the financial
sector had remained intact throughout? Instead, literature has identified episodes in
which there are signs of disruption in the financial system, in financial variables, in
macroeconomic variables or in some combination of these without a stronger
causal claim. For example, a direct sign of a large-scale disruption in financial
markets is the presence of widespread bank runs, bank failures or bank
insolvencies. While it is easy to determine whether there was a bank run or a bank
failure, insolvencies are much harder to spot. For this reason, the identification of
banking crises often relies on the assessments of specialists (Caprio and
Klingebiel, 1999; Laeven and Valencia 2008).
Another way to detect disruptions in financial markets is to look at the
behavior of financial flows and stocks. An important example of this strategy is
Calvo (1991), who looks for sudden stops in the inflow of foreign capital.
Mendoza and Terrones (2008) focus instead on credit booms, defined as large
departures of credit to the private sector from its long-term trend. As it turns out,
the peak of these booms oft en coincides with financial crises, especially when
they happen in less developed countries. A third approach is to look for loss in the
value of important classes of assets such as government debt (Reinhart and Rogoff,
2010), stocks and housing (Bordo and Jeanne, 2002). These are assets that
represent an important part of the balance sheet of households and firms, so that a
drop in their value may lead to an interruption in the flow of finance as lenders fear
for the value of the collateral that the borrowers have to offer.
Exchange rate crises can trigger or amplify a financial crisis if financial
institutions have liabilities in foreign currency (Diaz-Alejandro 1984; Calvo and
Talvi 2008). However, not all exchange rate crises turn into financial crisis. For
instance, while the collapse of the European Exchange Rate Mechanism in the
early 90’s was something policy makers at the time did not desire, in most cases
there was no spill over to the broader financial system. In this respect, Kaminsky
and Reinhart (2000) propose that it is useful to focus on episodes in which an
exchange rate and a banking crisis take place simultaneously.
The combination of criteria filters out episodes such as the ERM crisis as well
as episodes in which banking crises did not have any real effect. Lastly, Kehoe and
Prescott (2007) define episodes that they call “Great Depressions of the 20th
Century”. These are occasions in which a country has suffered a precipitous and
persistent output drop. Their definition lacks any reference to disruptions in the
financial sector but, as it turns out, there is a substantial degree of overlap with
financial crises identified in other studies. In spite of the different definitions, there
is a striking amount of agreement on the relevant events. Apart from the Great
Depression, most studies include observations from the Latin American sovereign
debt crisis in the early 80s, the Scandinavian collapse in the early 90s, Japan
throughout the 90s, the Asian crisis in the late 90s and Argentina in 1998-2001.
This coincidence strengthens the presumption that financial crisis represent a
reasonably well-defined economic problem, which is amenable to data collection
and systematic research.
Before discussing what happens during a crisis, it is important to understand
the period preceding a crisis. As the literature shows, this proves to be crucial in
designing and implementing the right set of policies. The identification of clear
antecedent patterns can provide a warning signal to policy makers and suggest
corrections to be taken in order to avoid the worse. While there are several factors
that led to the crisis, the most notable pattern is a period of “boom” in economic
and financial activity that gave rise to stock market and housing bubbles.
A stylized account of the “typical” boom can be reconstructed from the
findings of different papers in the literature. There are regulatory changes, which
allow banks to lend more freely and take more risk (Kaminsky and Reinhart, 2000;
Tornell and Westermann, 2002). What follows is an increase in the supply of credit
by banks, as they lend more relative to their assets and to their capital (Mendoza
and Terrones, 2008). To this increased supply of credit there is a matching increase
in the demand as firms increase their leverage and the government borrows more
heavily (Rogoff and Reinhart, 2010). At the aggregate level, these trends are
apparent in an increase in domestic credit (Mendoza and Terrones, 2008) and in
capital infl ows from abroad
(Rogoff and Reinhart, 2010). Prices of key assets react as house and equity
prices increase (Bordo and Jeanne, 2002; Rogoff and Reinhart 2010) and as the
exchange rate appreciates (Tornell and Westermann, 2002). All the while there is a
boom in economic activity, with an increase in output and investment. As the real
economy starts to lose steam, these trends revert abruptly, and the boom turns into
a crisis (Kaminsky and Reinhart, 2002; Mendoza and Terrones 2008). Two main
strands of the literature on crises attempt to account for the boom preceding the
bust. The first view states that the boom-bust cycle is evidence of excessive
investment and risk taking. In the second view, asset price boom increases liquidity
and facilitates investment. In particular, the boom in asset prices may stem from
self-fulfilling expectations about their value, rendering the boom fragile.
Examining both these strands of economic literature provides a more balanced
view of boom periods.
However, it should be noted that both strands of the literature point out that
booms eventually lead to busts. Despite the fact that there were many signals
reflecting the crisis, economists significantly underestimated the severity of the
downturns. Many economists, Nouriel Roubini among them, argue that some of
the optimism is built into the very machinery, the mathematics, of modern
economic theory. Econometric models typically rely on the assumption that the
near future is likely to be similar to the recent past, and thus it is rare that the
models anticipate breaks in the economy. And if the models can’t foresee a
relatively minor break like a recession, they have even more trouble modeling and
predicting a major rupture like a full-blown financial crisis. Only a handful of
20th-century economists have even bothered to study financial panics. (The most
notable example is probably the late economist Hyman Minksy, of whom Roubini
is an avid reader). As Roubini stated, today “we’re in uncharted territory where
standard economic theory isn’t helpful”.
Finally, literature review showed that economic science did not cause the
crisis. However, many of its theories did offer an intellectual background or some
sort of academic legitimacy to both policy and the markets, and, in the case of the
recent crisis, there was not only a failure of the dominant form of economic
thought but, above all (neoclassicist school, dominant until now, and Keynesian). It
should be noted that there is a problem of selective use of economic theories when
it comes to practical economics and that, in order to be useful, economics ought to
utilize knowledge from other disciplines and take more account of
interdependencies between political and social phenomena.
1.2 The world financial crisis during 2007-2012: causes and consequences
The global financial crisis during 2008-2012 is considered by many economists
to be the worst financial crisis since the Great Depression of the 1930s (Figure 1).
Figure1.The depth and duration of crisises, in terms of quarters
"Black
Monday"
(1987)
"Junk
bonds"
(1989-1990)
The
Mexican
Peco Crisis
(1994-1995)
Asian Crisis
(1997-1999)
IT
company's
crisis (2000-
2001)
Mortgage
crisis (2007-
2009)
1.0
6.0
4.0
2.0
7.0
10.0
4.1
6.6 5.1
1.3
4.1
9.5
Duration until the recovering period Total duration
Note: created by author based on The Global Europe Anticipation Bulletin
Generally, it resulted in the threat of total collapse from large financial
institutions, the bailout of banks by national governments, and downturns in stock
markets around the world. In many areas, the housing market also suffered,
resulting in evictions, foreclosures and prolonged unemployment. The crisis played
a significant role in the failure of key businesses, declines in consumer wealth
estimated in trillions of US dollars, and a downturn in economic activity leading to
the 2008–2012 global recession and contributing to the European sovereign-debt
crisis (Table 1).
Stage Stage characteristic
1st stage:
the middle 2007 –
2008
Crisis developed in the USA and Great Britain,
mentioning financial sector and the housing market.
Periodically there is a capital outflow from emerging
markets, as a result crisis begun in the countries of group
2а which are strongly depend on inflow of the capital and
with an overheat of economy (Kazakhstan, the countries
of Baltic, Ireland, Spain).
2nd
stage:
March 2008-
September 2008
In the USA problems in financial sector became
aggravated, the state was compelled to support Fannie-
Mae and Freddy-Mac. Unemployment rate showed a rapid
increase, despite the fact, that GDP growth rate is quite
stable. Developing (China, India) and some transitional
countries showed steady growth of gross domestic product
and the financial markets. The prices for oil broke records,
the dollar becomes cheaper, decoupling theory was
extended.
3rd
stage:
September 2008 –
February 2009
The sharp phase of crisis begins after bankruptcy of
Lehman Brothers and ING nationalization. A crisis of
confidence in the financial markets. Flight from risks.
Deleveraging. Collapse of international trade. Recession
of gross domestic product or sharp decrease in growth
rates in the majority of the countries of the world. Sharp
rise in price of dollar.
4th
stage:
March-July 2009
Emergence theory of «green sprouts». Stabilization of
falling of gross domestic product in the majority of the
countries of the world. Rally in stock markets. Restoration
of the prices raw materials. Purchases by China of metals
and other raw materials. Dollar reduction of the cost to
other currencies. Bond market restoration. Falling of
volume of bank crediting in the developed countries.
5th
stage
August 2009 -2012
Positive growth rates in the USA and EU. Fast return to
growth in the countries of Asia. In stock markets assets are
considerably overestimated if to estimate on Р/Е. Rally is
slowed down. The markets become unstable waiting for
sovereign or sub-sovereign defaults: restructuring of a
duty of Dubai-world, decrease in a rating of Greece and
etc. Some of the countries are compelled to turn off
support and to cut down the public expenses. The dollar
rises in price again, though isn't so strong, as year before
though isn't so strong, as year before. Greece gets a
€110bn (£93bn) bail-out from other countries using the
euro, and the International Monetary Fund. Euro
continues to fall and the public debt of other members of
EU starts to attract attention (Ireland). EU and IMF
agreed on 85 billion euro bail-out for the Irish Republic.
By the way Portugal recognizes that can’t cope with
problems and asks help from EU. Three countries mostly
affected by the crisis (Greece, Ireland and Portugal)
accumulated 6 percent of Eurozone GDP. However, Fitch
Ratings assumes that Greece finally declares a default.
The Swiss economy appeared on the verge of technical
recession. Low rate of probability that world economy will
recover in 2012-2013.
Table 1. Global financial crisis stages
Note: developed by the author based on BBC News, Bloomberg, The
Economist, Telegraph
To understand what happened in details it is important to be clear about what
has to be explained.
First, the subprime mortgage shock which triggered the crisis was not large.
The crisis was connected to subprime mortgages, a relatively new kind of
mortgage that was designed to make home ownership available to lower‐income
people, but which depended on house prices rising for its efficacy. (Gorton 2010).
When house prices stopped rising, there were expected losses on these mortgages,
many of which had been securitized. But, subprime was not large enough to
explain the crisis. At the time of the crisis there was about $1.2 trillion of subprime
mortgages outstanding, about 80 percent of which had been securitized. Even if
every single one of those mortgages defaulted with no recovery at all, it would not
explain the magnitude of the crisis. Furthermore, the losses on subprime mortgages
have not, in fact, been large. Park (2011) examines trustee reports on February
2010 for 88.6 percent of the notional amount of subprime bonds issued between
2004 and 2007. She calculates the realized principal losses on the $1.9 trillion of
originally AAA/Aaa‐rated subprime bonds issued between 2004 and 2007 to be 17
basis points as of February 2011. The same point is by the Financial Crisis Inquiry
Commission (FCIC) Report (2011: 228‐29) by looking at the ratings on
subprime mortgages.
The FCIC notes that: ”Overall, for 2005 to 2007 vintage tranches of
mortgage‐backed securities originally rated triple‐A, despite the mass downgrades,
only about 10% of Alt‐A and 4% of subprime securities had been ’materially
impaired’‐meaning that losses were imminent or had already been suffered‐by the
end of 2009.” So, if the shock was not large, how did we get a crisis?
Second, at the onset of the crisis all bond prices fell (spreads rose), not just
subprime‐related bonds. In particular, the prices of all manner of asset‐backed
securities fell. Why did the prices of, say, AAA/Aaa credit card asset‐backed
securities nose‐dive when this asset class has nothing to do with subprime
mortgages, and did not experience losses? Moreover, the prices of other securities
falling closely tracked measures of the deterioration of bank counterparty risk,
rather than track prices of subprime mortgages. Financial institutions’ counterparty
risk is usually measured by looking at LIBOR (the London Interbank Offered
Rate), the rate at which large financial institutions lend to each other, minus the
rate on the overnight index swap (OIS), which is taken as the riskless rate. So,
LIBOR minus OIS (LIB‐OIS) measures the risk premium in the interbank market.
Spreads on subprime did not follow this pattern, but rose continuously from
January 2007 (Gorton and Metrick 2012). The measure of interbank counterparty
risk and the spreads on non‐subprime bonds moved together, but they did not move
with subprime spreads.
Finally, any explanation of the financial crisis confronts another issue, namely,
the question of whether the crisis of 2007‐2009 was special, an unlucky
convergence of a number of unique factors. Or, was it at root fundamentally
similar to all the financial crises that have repeatedly occurred throughout the
history of market economies internationally? This question is especially important
for policy considerations.
The evidence discussed here can be summarized as follows:
Figure 3.Origins of world financial crisis
Note: International Institute for Labor Studies
So, the main causes of the global financial recession:
problems with selected by the U.S. model of economic advancement;
extensive development of derivative financial instruments;
prices at commodity exchanges;
inefficient investments risk assessment system, investing in risky
assets - the crisis in subprime.
In 2007 in the United States has badly hit by the burst of the property bubble
and panic spread over the country. Although the economy of United States grew by
0.6 per cent in the last quarter of 2007, down from 4.9 percent in the previous
quarter, day by day worsening scenarios emerge, from escalating oil prices, to a
depreciating dollar and financial institutions’ bailout by the Federal Reserve. Many
economists and policy makers share the view that a subprime‐led recession – i.e.
two consecutive quarters with negative growth – is inevitable and will be much
deeper and longer than the 2001 dot‐com downturn. United States recession will
undoubtedly have an important impact on the world economy.
In the Figure 4 it is clearly seen that world GDP growth rate following the
downturn of US economy. That means US economy has a great impact on the
global economy.
Figure 4.GDP annual growth rates, %
Note: created by author based on World Development Indicators & Global
Development Finance, World Bank Data
The main reason for that high level of economic integration among the
developed country and high foreign investment is the subprime sector of United
First of all, banks carry out a reorientation on short-term loans in order to
ensure the quick assets turnover and maintain the liquidity for external debt
repayment. Also because of borrowers’ insolvency most of banks have to sell their
collateral, cut down expenses: reduce the number of staff, shut down or merge
branches.
The second way is a support of the government. According to the crisis
management program the government of Kazakhstan supports the banking system,
small and medium enterprises, and agricultural sector of the country by allocation
the appointed sum of money.
There is internal credibility along with the danger of external threats. Average
rating of banks is in category B (not investment grade). Currently, bank financing
is limited to providing short-term resources to finance working capital and
restructure the existing debts of enterprises. This low-key approach to long-term
financing is explained by 2 main factors - the lack of long resources to finance
projects and the lack of quality borrowers.
Another major internal threat to the banking system is based on the quality of
loan portfolio. Deterioration in the quality of loan portfolio and the restructuring of
its receivables firstly affect the financial condition. Restructuring of all bank loan
portfolio, no doubt, will question the existence of individual banks, which are
either closed or conduct a merger with the more successful competitors.
Figure 19. Banks’ Lending Flows and Stock
Note: The World Bank
The process of restructuring the loan portfolio partially is prevented by the tax
laws. According to Tax Code, cutoff of bad loans from the balance causes the
return of provisions, resulting in an additional tax. Now the Government is
considering the abolition of the provision and appropriation of amendments to the
Tax Code of RK.
Another obstacle to getting rid of nonperforming loans is the absence of market
mechanisms to work with liens, transited to private banks after the borrower’s
defaults.
Thus, the implementation of a complex bank resolution, aimed at reducing the
share of nonperforming loans, is inhibited by the current system of tax
administration, legal and regulatory frameworks and lack of market sales of low-
quality assets.
Figure 20. Banks’ ROA and ROE
Note: developed by author according to Committee for the control under the
NBK
An important condition of renovation is a gradual reduction of state support of
the banking sector. Of course, the withdrawal of deposits of state structures from
banks, the reduction of equity should be commensurate with the need to maintain
economic growth. It is necessary to maintain a balance between keeping inflation
under control and support the banking sector.
After a period of continued growth, supported mainly by the inflow of foreign
loans, growth has now slowed substantially, from a 30% increase in 2007 to
negative 5% in 2008. During the global liquidity crisis Kazakh banks did not have
any alternative opportunities to draw relatively cheap foreign funds. In the first half
of 2009 the banking trends were mixed regarding changes in asset quality and
other important indicators.
If we look at the dynamics before the start of 2009 changes in the indicators
were due to external funding, but in late 2008 early 2009 they were affected mainly
by the decline in asset quality and government anti-crisis measures to support the
economy and the banking sector. In the first quarter of 2009 the indicators were
primarily affected by the actions of the government and state funds to support the
banking system by adding capital to a number of systemic banks. In particular, the
charter capital of Kazcommercebank and Halyk bank was increased by 25%; the
government also significantly boosted the capital of BTA bank and Alliance bank.
Unresolved non-performing loans (NPLs) are now the biggest concern for the
financial sector and a significant problem for the private sector.
Figure 21. Banks’ Non-performing Loans and Provisions
Note: The World Bank
As of end-February 2012, banks recognized NPLs in the amount of US$ 24
billion (33.8 percent of total loans, or 13 percent of GDP), but informal estimates
place NPL figures at higher levels. Half of NPLs are concentrated in the three
failed and nationalized banks. Thirty one percent of the credit portfolio has been
set aside as provisioning against non-performing loans. While this provisioning
may seem sufficient to maintain stability in the financial sector, these resources
that could have been used for new lending are being tied up. This impedes private
sector enterprises from making new investments and obtaining sufficient working
capital. At the same time, high loan losses have made banks overly risk averse,
demanding high levels of collateral and reducing the tenor and volume of credit
available. Limited tenors reduce firms' ability to finance long-term capital
investments required to support the country's economic diversification objectives.
Under these conditions, when the search of tools providing sufficiency of bank
capital is complicated, funding sources are reduced and government control is
tightened, significant controlled access to credit, increases the uncertainty in the
Kazakh banking system and risks to economic growth downsides. This means that
today the sources of reviving the Kazakh economy are mainly outside of the
banking sector. And if the bank system grew faster than real sector of the economy
in the pre-crisis, but today it hampers its development and does not meet the needs.
So, the main factors affecting the banking system in the short and medium term
are:
Further decline in the quality of assets;
Decline in revenue and an increase in the number of unprofitable banks;
Less interest from foreign investors in Kazakhstan’s banking system due to
the fact that a number of banks stopped making payments on external liabilities
and started restructuring;
Growth of risks due to noneconomic regulation of the banking system from
the government.
To counter the phenomena of bank stagnation must change their business
model and follow reforming directions:
Conducting upgrade (modernization, renovation, re-evaluation) of the
business model of banking activities. Adaptation principles should be established
in business model, continuously evaluating in compliance with the new economic
conditions.
Development of new strategies to reach markets. Optimization requires the
presence in the markets of different banking products and (or) services, expanding
their range and increase market supply, including at regional level.
Optimization of operational flexibility. Necessary to increase the efficiency
of banking due to the flexibility of the structure and optimal use of resources, the
use of LIN-approach (lean production, the philosophy of "lean production") to
create a new operating system.
Improving the quality of risk management process. It should change the
quality of implementation of the regulatory requirements set market risk
assessment and develop a robust integrated system of internal control and
planning.
Optimizing access to sources of funding and location. The growing
importance of domestic savings in the condition of limited financing dictates the
need to find new ways to access funding and allocation of funds to provide greater
flexibility and stability.
Strengthening membership of the top managers. It is necessary to maintain
and keep the team leaders who can work in difficult economic and organizational
conditions, and ensure the effective use of independent directors.
Strengthening the system of corporate governance principles, approaching to
the international standards. Also it is necessary to restore and maintain the
confidence of international financial institutions, potential investors and customers
by ensuring the transparency of financial and non-financial information and
improve the communication process.
Today experience of crisis period and post-crisis development require
transition of bank system to a qualitatively new model of activity, which becomes
the foundation for strengthening the regulatory role of state in the country's
financial sector, based on the principles of state-private partnership, counter
recurrence, legislative regulation.
The Government's strategy for diversification and competitiveness of the
economy is anchored in the recognition of the paramount role of the private sector.
Though diversification towards non-extractive tradable has been part and parcel of
Kazakhstan’s development strategy, actual success has so far been limited. The
economy was, and remains highly resource-dependent, with manufacturing
accounting for 11 percent and agriculture for 5 percent of GDP. The diversification
agenda proved difficult in the face of booming commodity prices leading into the
crisis. The GoK post-crisis recovery program puts a major emphasis on increasing
the non-oil sectors’ contribution to growth. That’s why business is likely to be
more optimistic as a result of a huge support from the Government.
Figure 22. The balance of business confidence, %
Note: developed by author according to The Agency of statistics of the
Republic of Kazakhstan
So, Kazakhstan has rebounded well from the economic recession that affected
the country in the first half of 2009. Rising commodity prices and the expansion of
the oil industry have helped to revive the economy with continued growth
predicted, barring a dramatic decline in oil prices. However, most non-resource
sectors of the economy continue to suffer from low productivity and
competitiveness, and the country remains vulnerable to commodity price
fluctuations.
2.2 Anti-crisis measures conducted by the National Bank of Kazakhstan
during the crisis
The national Bank of the Republic of Kazakhstan represents the uniform
centralized structure with the vertical scheme of submission. Legal status of
National Bank of the Republic of Kazakhstan is fixed in the Law of the Republic
of Kazakhstan from March 30, 1995 of No. 2155 «About National Bank of the
Republic of Kazakhstan» according to which the central bank of Kazakhstan
within provided to it economic acts of powers is independent in the activity.
Bodies of representative and executive power haven't the right to interfere with
activities of National Bank of Kazakhstan, its branches, representations and the
organizations for realization of its legislatively fixed powers.
The national Bank of Kazakhstan coordinates the activity with the Government
of the Republic of Kazakhstan. The national Bank and the Government are obliged
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to inform each other on prospective actions and the reached results having nation-
wide value, and to carry out regular consultations.
The national Bank of Kazakhstan considers economic policy of the
Government in the activity and promotes its realization if it doesn't contradict
performance of its main functions and monetary policy implementation. The
chairman of National Bank or one of his deputies has the right to participate in
Government meetings with the right of an advisory vote. The government doesn't
bear responsibility according to obligations of National Bank, also as well as the
National Bank doesn't bear responsibility according to Government obligations,
except for cases when it takes up such responsibility.
Main objective of National Bank of Kazakhstan is ensuring stability of the
prices to the Republic of Kazakhstan. For realization of a main objective the
following tasks are assigned to National Bank:
- development and carrying out monetary policy of the state;
- ensuring functioning of payment systems;
- implementation of currency regulation and currency control;
- assistance to ensuring stability of a financial system.
According to the Law of the Republic of Kazakhstan No. 2155, the monetary
policy is carried out by National Bank of Kazakhstan by establishment:
- official rate of refinancing;
- levels of rates of compensation on the main operations of a monetary policy;
- standards of the minimum reserve requirements;
- in exceptional cases direct quantitative restrictions on level and volumes of
separate types of operations.
With a view of monetary policy realization the National Bank of Kazakhstan
carries out the following types of operations: granting loans, reception of deposits,
currency interventions, release of short-term notes of National Bank of
Kazakhstan, purchase and sale of the state and other securities, including with the
right of return repayment, an inventory of commercial bills, other transactions of
the decision of Board of National Bank of Kazakhstan.
In 2004 according to the Decree of the President of the Republic of Kazakhstan
from December 31, 2003 of No. 1270 «About further improvement of system of
public administration of the Republic of Kazakhstan» from system of National
Bank of Kazakhstan the independent structure - Agency of the Republic of
Kazakhstan on regulation and supervision of activity of the financial market and
the financial organizations which together with which the National Bank of
Kazakhstan carries out control and supervising functions behind a banking system
of the republic was allocated.
Since August, 2007, the RK National Bank carried out a number of measures
for support of liquidity of a banking system. From August to December, 2007
intensive support of BVU was carried out to the period by granting short-term
liquidity in the form of return a repo, the SWAP, the SWAP on the security of
MRT, currency the SWAP.
In August, 2007 the RK National Bank made changes to Rules about the
minimum reserve requirements, the bases of reserve obligations directed on
reduction and expansion of structure of reserve assets that should allow to banks of
the second level to liberate money in addition.
In 2008 the RK National Bank the list of mortgaging providing on refinancing
operations was twice essentially expanded.
Possibility of negative consequences as a result of influence of «effect of
infection» caused of change of prudentially standards for the purpose of decrease
in level of risks of a financial system. For this reason of AFN accepted a number of
the measures directed on reduction of the external economic risks, risks of liquidity
and sufficiency of the capital.
Besides, on October 23 the current year the Law of the Republic of Kazakhstan
No. 72-IV «Was passed about modification and additions in some acts of the
Republic of Kazakhstan concerning stability of a financial system». This Law is
directed on improvement of mechanisms of early diagnostics of risks in a financial
system, expansion of competence of authorized body in case of default by
shareholders of the financial organizations of requirements of authorized body on
improvement of a financial condition of the financial organization; increase of
requirements to executives and large participants of the financial organization with
a view of increase in responsibility of the financial organization for the accepted
obligations. It is necessary to allocate especially the following norms directed on
maintenance of financial stability:
- increase of the sum of guaranteed compensation on deposits of individuals to
1 million tenge and as a stabilizing measure to 5 million tenge till January 1, 2012
is provided.
- the ban for the 2nd
tier banks which do not have large participants -
individuals, or parental bank, and also the holding company, having a certain rating
of one of the rating agencies which list and the minimum demanded rating is
established by authorized body, on implementation of reception of deposits of
individuals, opening of accounts of individuals is provided. Introduction of this
ban is provided since 01.01.2010.
- the ban on change of rates of compensation which acts within three years
from the date of official publication of the specified law (24.10.2008г is provided),
i.e. 2nd
tier banks and the organizations which are carrying out separate types of
bank operations, the concluded contracts of a bank loan (including a mortgage
loan) with the individuals, having not the right to change a compensation rate
above the size established by conditions of contracts during specified term.
- the norm according to which the Government of the Republic of Kazakhstan
in coordination with authorized body has the right to make the decision on
acquisition by the Government or national management company of the declared
stocks of 2nd
tier banks at a rate of not less than ten percent from total of the placed
actions with a view of early response to the arisen problems in 2nd
tier banks
expressed in essential violation of prudentially standards and (or) other obligatory
norms to observance and limits is provided. In case of improvement of a financial
condition of 2nd
tier banks, the Government takes measures for implementation of
the acquired stocks of 2nd
tier banks.
Deterioration of an internal environment and decrease in cumulative demand
were negatively reflected in activity of non-primary branches of economy, having
reduced their profitability and solvency. More all suffered those branches of
economy which more others need continuous replenishment of current assets at the
expense of crediting: trade, services, construction sector. The negative effect of
crisis also noticeably affected the enterprises of small and medium business. These
factors led to fast deterioration of credit portfolios of the majority of the banks,
lowered rates only in the second half of 2009.
In 2009 the steady tendency of decrease in inflation was noted. Low business
activity, stagnation of credit activity of banks, low growth rates of the monetary
income of the population, a limited consumer demand served as major factors of
decrease in an inflationary background in economy.
Following the results of 2009 inflation developed at level of 6,2 % (drawing 2)
that in 1,5 times it is less in comparison with inflation of 2008 (December, 2008 by
December, 2007 of-9,5 %). Mid-annual inflation made 7,3 %.
In 2009 delay of annual inflation occurred against decrease in growth rates of
the prices for foodstuff and paid services whereas growth rates of the prices for
nonfoods were accelerated. Food stuff became more expensive for 3,0 % (in 2008 -
for 10,8 %), nonfoods - for 8,6 % (for 5,7 %), paid services to the population - for
8,4 % (for 11,4 %).
Delay of inflationary processes in 2009 allowed National Bank to pursue a
monetary policy directed on ensuring of stability of an exchange rate of tenge and
stability of financial sector of the country.
Figure 23. Tenge Devaluation and Maintenance of the Exchange Rate Stability
Note: National Bank of Kazakhstan
As shown above, in February, 2009 the National Bank established a new
corridor of an exchange rate of tenge at level of 150 tenge for dollars +/-3 %. One-
stage change of an exchange rate allowed to reduce considerably devaluation
expectations, to improve a condition of the balance of payments, to keep gold and
foreign exchange reserves of National Bank.
In the domestic currency market in 2009 the National Bank acted mainly as the
seller of foreign currency. For 2009 net - sale of National Bank in the domestic
currency market made 5,4 bln. dollars. Thus, if from January to October the
National Bank provided the offer of foreign currency in domestic market, in
November-December, 2009 the National Bank performed operations on purchase
of foreign currency in the domestic currency market which volume during this
period made about 4 bln. dollars.
In 2009 the National Bank took additional measures for ensuring stability in
the financial market. Measures for granting to banks of short-term tenge liquidity,
and also for improvement of system of refinancing of banks by National Bank
were taken.
In 2009 the National Bank provided refinancing loans to banks by means of
operations of return of a repo and in January-February, 2009 - operations SWAPS.
In March, 2009 the National Bank stopped carrying out operations a currency
SWAP and the SWAP on the security of the remains of money on correspondent