Conversation with president about foreign debt

The whole budget of the country is at stake.

It was a subject of a serious conversation last week between the country's president and an official, who had to supervise over order in the financial sphere per his job duties as the head of the Financial Control Agency.

What was the dialogue about - nobody knows it in detail. But it can be guessed with the highest degree of certainty…

The president asked Bolat Zhamishev to outline the situation with the foreign debts.

"The objective situation is the following, - Mr. Zhemishev says. - Currently the total foreign debt is about 24 billion USD, while the GDP 2004 is going to be 32 billion."

It means that the country has already crossed the threshold that it better had not. Living in debts is possible, but, per economic laws, the foreign debt should not exceed 75 per cent of the GDP.

On the contrary, when unfavourable circumstances coincide, for instance, when the cost of foreign debt service or when there is a global financial crisis, a default can be declared in the country.

"How could it happen?" - Mr. president surely asked.

In the last few years the state virtually stopped its policy of living for debts. The government does not borrow money abroad. Moreover, the state itself having its National Fund and investing its money in securities of respectable financial institutions in the West, it is a net creditor, that is it credits more than it borrows.

Besides, it is already impossible, apart for some exceptional cases, to obtain a foreign credit under a government guarantee. The early 1990-s, when all wishing could borrow from foreigners under state guarantees, are over. So where does the current debt come from?

"Firstly, the debts between firms are high. More than 12 billion USD are owed by companies operating in Kazakhstan to their parent companies based abroad, - the head of the Financial Control Agency explained. - Secondly, foreign debts of the banks have also grown significantly. Getting high ratings from international agencies they now have an opportunity not only to attract foreign loans on profitable rates, but also to allocate their securities among foreign investors."

The debts between firms are not subject to the Financial Control Agency competence. It cannot dictate to the private business how to conduct economic activities. Besides, such a big amount - 12 billion USD, is not surprising at all, as it is owed by oil & gas ventures, requiring big capital investments. It is hardly likely that anything has to be corrected or changed in this sphere: while there is a headlong growth of oil production in Kazakhstan, it would not be rational to lower artificially the debts between firms, being a part of the general foreign debt, (on the contrary there is a high probability that they can grow). Another thing is the bank policy of borrowing. The FCA can utilise harsh regulating mechanisms to avoid financial disasters.

"Do we really so much need those foreign credits that we are risking to disrupt the balance achieved by us in the last few years?" - the president could probably ask.

"The situation with foreign debts is ambiguous, - the FCA head said an went on to explain:

- The positive side: an inflow of capital, a possibility to invest it in the national business development, a growth potential of the national economy. The negative side is a necessity to follow the development of situation and to be ready that a necessity to change it can appear at any moment."

Kazakhstani banks are very proud of working with foreign investors. This year the most successful of them have managed to ink three-four credit agreements with syndicated of foreign financial institutions. Moreover, the more our bankers borrow, the more favourable are conditions on which they get the money. In perspective we can obtain certain dividends from these loans. In particular, the bankers say that it is exactly foreign loans that allow them to prolong credit terms on consumer and development programmes, to lower interest rates, to broaden the list of services for clients. But the bank itself receives the profits: its profitability, capitalisation, and the client base are growing. That means a whole cascade of advantages. A potential disadvantage is that not all banks can allocate their money on the credit market. It is the skill of a bank management to work with the attracted loans and to allocate them well that the repayment of debts depends on. Meanwhile the credit investment policy of the Kazakhstani banks is correct: only commencing their negotiations on loans with syndicates of foreign banks, they right away start to reflect on ways to invest this money on the national market. There are no ideal schemes: taking a syndicate for 100 million dollars and to transfer the whole amount to a trustworthy Kazakhstani borrower (because big companies needing such money, as a rule, can borrow on the foreign market independently), but the money don't remain in the banks as a deadweight for a long time. Taking into consideration a certain scarcity of the monetary mass, currently observed in Kazakhstan, the loans are more and more required.

But the bordering 75 per cent of foreign debts against the GDP is one thing and 76 % - is quite another thing. And the president most likely ordered Zhamishev to take measures on reducing credit the debts.

What is to be done in such situation? Bolat Zhamishev once confessed to journalists that it is possible to reduce foreign debts without direct bans. It is enough to create such conditions under which it would become unprofitable to borrow money abroad.

It is quite possible that after his meeting with the president the FCA chairman will order his employees to think well about how the foreign debt can be reduced.

And although information agencies have not report any details on this meeting, apart from its subject, one can suggest that it has not been concluded by a simple report of the official from Almaty.

The president does not receive someone for no reason. Moreover, in the last two years we observe a stable tendency towards a growth of foreign loans. So we have not noticed how the country crossed the critical threshold. Of course, one per cent is not a tragedy, but it is a signal that something must be done about it.