By Rudi Filapek-Vandyck
Kazakhstan may be the world’s leading producer of potassium (the best according to Sacha Ben Cohen’s alter ego Borat) but the country may soon attract a lot more attention as rising problems for the country’s leading banks now suggest Kazakhstan could become the first victim among emerging countries of the global credit squeeze.
Some of largest Kazakh banks are now facing the costs of heavy foreign borrowing in a period with significantly higher risk premiums in the money and bond markets. Investors have already drawn their conclusions and sold off their holdings of Kazakh state bonds over the past few days. To make matters worse, credit ratings agency Standard & Poor's has now put Kazakhstan on a negative watch, while colleague Moody’s is considering lowering its rating for the country's largest bank, Kazkommertsbank.
And would you believe it, over the last days corporate and banking bonds in neighbouring Russia have experienced some pricing pressure as well with market analysts suggesting there may be a spill-over effect from the Kazakh problems.
Economists at Danske Bank were quick in explaining why the world is all of a sudden paying attention to Borat’s home country: it is yet another example that the global credit crunch is becoming visible in Emerging Markets, especially in highly leveraged economies or in countries with a weak financial architecture.
Don’t expect Kazakhstan to collapse amidst a queue of unserviceable debts as the country’s government debt is actually quite low with a debt-to-GDP ratio of 4-4.5% only. It is for this reason that Danske economists believe the government will bail out any financial institution that might hit the wall and do whatever it takes to save its financial sector from tumbling in complete turmoil. Out of the two categories of Emerging Market countries mentioned in the previous paragraph, Kazakhstan is merely a country with a weak financial architecture, but what will happen in countries with high debts to serve?
That is the big question currently on the mind of Emerging Markets watchers. Think Eastern Europe, and Venezuela, among many others. Will one of them become the next whale (see below) to emerge from the global subprime fallout?
Danske economists put it as follows: “In the time ahead we are likely to see other Emerging Markets economies -especially the highly leveraged and imbalances ones- face strains in their money and local bond markets. We are likely to see more victims of the global credit crunch.”
(The usage of the term whale in this context is in reference to an analogy used by market analysts and strategists GaveKal. For those who’ve not read our earlier stories on the matter: GaveKal believes a global liquidity squeeze is best compared with dynamite fishing. After the underwater explosion you first see the little fish come up to the surface. Next you see the bigger fish. Ultimately, and this is a long while after the explosion, you’ll see the whales coming to the surface with their belly up. Northern Rock was the first corporate whale. It is widely expected at least one country might follow the UK lender.)
