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Friday, December 21, 2007

Kazakhstan & the Credit Crunch

An interesting Bloomberg article on the effects of the credit crunch on this EM state:
Western investors pumped $40.7 billion into Kazakhstan, most during the past three years, according to Moody's Investors Service. The money provided the cash for a surge in domestic lending for new homes, cars and other accoutrements of the country's improving fortunes. Now, the foreign money has almost dried up.
Kazakhstan banks' sales of Eurobonds and syndicated loans, which totaled $8.63 billion during the first eight months of 2007, fell to $300 million in the following three months, according to data compiled by Bloomberg.
Four times the size of Texas, the central Asian country parodied in the 2006 movie ``Borat'' boasts an $80 billion economy that has grown almost 10 percent a year since 2000.
Yes, but the growth has been achieved with outside investments probably averaging around 10 billion a year for the last few years, or 1/8th GDP. To put it another way, that's 12.5% of GDP, and now that money has dried up. The consequences for Kazakhstan's domestic economy are likely to be quite severe. They might get back 3-4 billion of that.

There are similar situations in many such countries. Note that Kazakhstan's major economic resources at this time are metals, minerals and fuel. These are all commodities which are acutely sensitive to world growth.

My belief is that these lower echelon EM countries are likely to be starved of funds and that growth will be very constricted, which will begin to chip away at global infrastructure improvements. It's a reality that those with money to spend are more likely to invest it in buying cheap shares in the likes of Merrill and Citibank rather than continuing to pump it into the ex Soviet bloc countries.

Poland may be in a similar situation. The next tier of EMs are likely to do better, because they are more developed. Still, the world is shortly going to be in competition for money, and the weaker economies will be elbowed off the trading floor.

And, btw, so will the more reckless financial investments. Understanding the true plight of credit insurers such as MBIA is related to the fact that their revenues are drying up as their expenses increase.

I think Poland is over the US and is now courting Putin who did save Russia from the bankers.
If export of natural resources is the boon of Kazakhstan, it is also its bane, as it has led the country to import pretty much everything else..first and foremost capital.. Lean years are ahead as the effects of the liquidity squeeze are yet to percolate through the wider economy.. and banks, which have received government help to stem deposit runs, are now dealing with the long term problem of non performing loans and falling capital adequacy ratios..But you won't have a devastating emerging market crisis like SE Asia in 97-98.. simply because the demographics are favourable.. one thing is to fix a bust banking system with a domestic depositors base of only 6million who account for only 20% of total bank funding, another is to deal with 60 million depositors who were at risk of losing their savings like Indonesia in 98..the flip side of this, though, is that Kazakh domestic saving rates are nil.. there is almost no domestically-generated capital formation in this country.. those Kazakhs with sufficient disposable income should be educated in the first place about the difference between speculating and saving.. Look at the property bubble in Almaty. Anyone with an RNN (Tax ID number) could take a mortgage and buy a condo off-plan, betting on the positive carry between financing costs and rising capital values.. But the buck has stopped, there are no takers for all these flats, and some 20,000 people in Almaty alone are sitting on negative equity.. Poor buyers? Not really.. it's the banks that will really take the hit, as there is little in the way of repossessing an unbuilt apartment sold offplan
Poland has a history of having countries walk across it ;) I seriously doubt that they want to cosy up to the Russians again. On the other hand, if they can't count on NATO to watch over them, then they'll have to make some sort of deal with the Russians.
Putin is not my idea of huggable, Jo6Pac. Poles are tough, but not that tough! With any luck they can muddle through with the EU, but first the EU is going to have to wake up and smell the coffee. Teri, if NATO doesn't do it I have trouble seeing the EU do it.

Steppenwolf, an astute analysis. I don't have anything to add - I wanted to use the country as an example.

The downward cycle involved in a real credit crunch shows up in many odd places, but it does show up and it does affect demand for fundamentals such as steel and concrete.

Many other EM countries will have similar situations. Some of the European and American (I mean north and south) companies will see a drop in their orders and revenues as a result.
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