Kazakhstan’s Carefree Corridor Talk

Kazakhstan issued EMEA’s biggest sovereign bond this year as a dual tranche $4 billion instrument was oversubscribed at 5-6 percent yields and US buyers diversified the investor base. The return did not help equities down double-digits on the MSCI Frontier Index and came as the exchange rate corridor was nudged from 188 to 198/dollar despite consensus devaluation projection to 220-230 in line with Russian ruble adjustment throughout the region. International reserves in two funds are almost $100 billion, but the central bank has spent about one-fifth that amount the past year supporting the peg. The IMF in its latest Article IV report urged flexibility as the current account deficit will again come in at 2 percent of GDP on 1 percent economic growth. Oil prices have not firmed and the Kashagan field will not match original size as project ownership and royalties remain fluid. President Nazarbaev hinted at succession and business reforms on winning re-election, but has been a steadfast member of Moscow’s Eurasian Economic Union recently joined by next-door Kyrgyzstan.

Sovereign gross placement has been only $50 billion through mid-year with Poland, Romania and Turkey in the same geographic bucket. External corporate activity has also flagged at $170 billion over the period with almost no Europe supply, according to JP Morgan figures. Among the CIS group, Georgia spreads widened while Belarus and Ukraine risks declined on commercial restructuring deals in the works. On the latter Finance Minister Jaresko began direct negotiations with the Frankin Templeton-led creditor committee in Washington as parliament passed banking, energy and anti-corruption measures to get the next $1.7 billion IMF installment. However the opposition party Fatherland founded by jailed democracy campaigner Tymoshenko has backed populist proposals including dollar loan repayments at the old pegged currency value to upset the mix. Although reserves are back to $10 billion with Western assistance and a Chinese swap line, the central bank continues to intervene regularly in the spot market and to enforce capital controls within capacity limits. A delegation to a US Chamber of Commerce conference in July was angered by another large EU rescue for Greece in exchange for long-promised fiscal changes, as they pointed out Kiev’s actions in a short time under a civil war program a fraction of Athens’ scale. Representatives added that private bondholders resist any haircut unlike in the Greek case where an unprecedented 75 percent reduction was accepted.

With the latest lifeline Greek banks will continue to struggle even with resumed ECB liquidity injections, and their four subsidiaries in Bulgaria with a 20 percent market share could require near-term infusions as a new central bank governor was approved. The incumbent resigned over handling of the BCB crisis last year which was initially blamed on a text message conspiracy. Serbia has avoided such fallout as post-flooding mining output revives with the benchmark interest rate steady at 6 percent under its IMF arrangement. Turkish officials have concentrated more on the geopolitical ramifications as Mideast and African migrants pass through porous borders and Cyprus reunification talks are due to restart under fresh Northern leadership. Coalition attempts are now formally underway in Istanbul under a 45-day deadline before rescheduled elections as stubborn 8 percent inflation and a 5 percent of GDP current account gap defy joint management.