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September 14, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with the Republic of Kazakhstan. The Executive Board notes that certain risks and challenges remain, despite extensive and costly financial support to banks. Actions are needed in the areas of asset quality and governance, supervision and regulation, emergency liquidity assistance (ELA), credit subsidies, collateral and foreclosure, and disposal of distressed assets. Further strengthening of the resilience of the banking sector will contribute to sound macro-financial linkages and growth, while reducing risks.

The staff report notes that the authorities have taken major steps to secure the stability of the financial sector, although certain risks remain and nonperforming loans (NPLs) also remain elevated. Legal changes to enhance the National Bank of Kazakhstan's (NBK) regulatory powers, particularly on use of supervisory judgment, were adopted by parliament in June. NBK withdrew or suspended licenses of several medium-size and small banks that were in violation of prudential requirements. Long-term funding remains limited and a number of initiatives are being rolled out, including NBK support for mortgage lending and purchase of bank bonds by the pension fund. High NPLs and large volatility of deposits affected lending and, in 2017, private sector credit was flat.

Although certain actions of authorities actions have helped preserve systemic stability, state support has been costly. The banking sector continues to experience difficulties from weak credit risk assessment and management and needs to adopt a substantially stronger business model, with enhanced governance, management, operations, and profitability. The IMF staff urged that policy actions be taken in several areas:

  • Large banks—including those that received state support and NBK subordinated loans—should undergo a thorough balance sheet evaluation. A comprehensive asset quality review—ideally by an external party—would help define the magnitude of remaining potential problem loans. Further capital support should come from shareholders or new private investors.
  • Banks that received state support, and those with continuing constraints on portfolios and profitability, should undertake operational restructuring to ensure sound governance and proper risk assessment. This would address the moral hazard concerns.
  • Recent amendments to the Law on NBK and the Law on Banks and Banking Activity aim to reflect international good practices in bank supervision and resolution. NBK should prepare regulations to formalize its use of broader powers. Another weakness that should be addressed relates to capital regulations, which allow banks to shift NPLs to non-bank subsidiaries that are not subject to consolidated capital requirements.
  • The ELA framework for banks also needs attention. ELA should be provided only to institutions that are assessed as viable and should be adequately collateralized or provided under government guarantee.
  • Further financial infrastructure improvements are needed, including in collateral valuation and foreclosure and disposal of distressed assets. 

The selected issues report addresses fiscal risk management, key elements of the new regime of natural resource taxation, use of interest rate rules to inform monetary policy, reforms related to reserve requirements, macro-financial assessment, and economic diversification through trade. The report highlights that stronger and more effective macro-financial linkages would require improvement in the condition of banks and enhancements to the regulatory framework. Over the longer term, efforts are needed to promote financial development, which will be critical for diversified, sustainable, and inclusive growth.


Related Links

Keywords: Asia Pacific, Kazakhstan, Banking, Article IV, NPLs, NBK, IMF

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