Irish Solution Ties Kazakh Retirement Savings to Bank Defaultsby and
Central bank plows investments into banks as ratings slide
Historical parallel in 2010 Irish bank bailout, S&P says
When Kazakhstan’s biggest lender had its credit downgraded closer to levels that ratings firms reserve for borrowers in default, state managers of $17 billion of retirement savings were undeterred.
Rather than scale back investments in bank bonds and deposits, already at 34 percent, the government cleared the way for 200 billion tenge ($576 million) more from the pension fund to be put into Kazakh lenders. Kazkommertsbank JSC, downgraded by Fitch Ratings on Jan. 19 to within four levels of its bottom rung, is the top holding at 7.2 percent.
Efforts by Kazakhstan to avoid a repeat of the 2009 bailout of the financial system by dipping into its citizens’ retirement cushions are being applauded by some foreign investors who suffered losses from writedowns on $20 billion of debt. Others question the investment case for speculative-grade banks that enjoy ties to the political elite in the largest oil producer among former Soviet satellites.
"They are suffering badly from losing income from oil, and because it’s a small circle of people, they do whatever they want,” said Anders Aslund, senior fellow at the Atlantic Council in Washington, who served as an economic adviser to the Russian government from 1991 to 1994. “Kazakhstan has big reserves. I think that it’s just the beginning, and they will tap into the funds more and more as oil price stays at the same level.”
Other countries have turned to retirement savings to prop up banks, including Ireland in 2010. Failed Irish banks forced the nation to seek 67.5 billion euros ($73.3 billion) of international aid, which it supplemented with 17.5 billion euros from the National Pensions Reserve Fund, according to Standard & Poor’s. Lutz Roehmeyer, a director at Landesbank Berlin Investment, welcomes the home-grown solution to anchor the Kazakh financial system and curb losses.
Now “they should think twice about the next bank failure,” said Roehmeyer, who holds Kazakh notes that resulted from the 2009 restructuring.
Since it took over running state-backed pensions two years ago from private managers, Kazakhstan’s central bank has increased the allocation to junk-rated banks from about 22 percent. Kazkommertsbank’s credit quality has declined since it acquired Almaty-based BTA Bank JSC in 2014, five years after its government rescue. The lender is controlled by Kenges Rakishev, the defense minister’s son-in-law.
The bank’s $750 million of 5.5 percent notes due in 2022 were quoted at 64 cents on the dollar, near a level indicating distress, a decline of 10 cents since the start of the year.
Kazakhstan’s central bank said investments in the financial industry are being gradually curtailed, with allocations dropping 46 percent this year to 200 billion tenge. The "stable functioning of banking sector is a key factor for the country and the government," it said in an e-mailed response to questions.
The investments aren’t unreasonable given the high concentration of bank debt in the local bond market, said Dmitri Petrov, a London-based analyst at Nomura International Plc. According to data compiled by Bloomberg, lenders account for 54 percent of $55.5 billion of company debt outstanding. The pension funds also carry a government guarantee and are indexed to inflation.
“It’s high, but not too high considering the universe of local investable assets is limited,” said Petrov, who visited Kazakhstan in February and recommends the tenge and quasi-sovereign bonds to clients.
In its decision to downgrade Kazkommertsbank to CCC, Fitch said the bank is “likely to require external capital support and/or a restructuring of its liabilities to restore its solvency.” Half of its balance sheet comprises loans inherited from BTA with “unclear recovery prospects,” Fitch said. Larissa Kokovinets, a spokeswoman for Kazkommertsbank, declined to comment.
The banking industry poses risks to sovereign creditworthiness, S&P said Feb. 17 as it cut Kazakhstan to its lowest investment grade, saying “maintaining the banking sector’s stability contributed” to the negative outlook.
In addition to Kazkommertsbank, 6.1 percent of pension money is held in Halyk Savings Bank of Kazakhstan JSC, which is controlled by President Nursultan Nazarbayev’s daughter and was lowered by S&P in February to the second-highest junk score. Kaspi Bank JSC, a lender that accounts for 4.4 percent of holdings and is co-owned by a nephew of the president, is rated a step lower. The yield on Kaspi Bank bond due this year rose 11 basis points on Thursday to 8.8 percent.
While the central bank has a mandate to buy bank debt, it should be wary of risk, said Damir Seisebayev, head of research at Private Asset Management JSC in Almaty.
“Pension funds are not speculators,” he said. “There must be more emphasis on the quality of the debt. The safety of retirement savings must come first.”