Kazakhstan’s Contrived Constitutional Corollary

Kazakh shares were up almost 30 percent to head the MSCI frontier list through February as President Nazarbaev proposed constitutional changes to decentralize power and chart a succession path, and the two biggest state banks were merged with a $6 billion infusion after the IMF called for “prompt” action in its Article IV report. The 75-year old leader announced 35 amendments that will transfer more authority to the cabinet, parliament and provincial bodies following working group consultations nationwide that spurred over 5000 submissions for post-independence charter improvement. The political transition roadmap was outlined as the country tries to balance its diplomatic and geographic position between China and Russia, and the Fund brightened the GDP growth and inflation forecasts to 2.5 percent and 6.5 percent within the target range respectively. The currency strengthened to 310/dollar in March, and exchange-listed privatizations, with major infrastructure and natural resource firms on the block, are designed to cut the non-oil fiscal deficit to 5 percent and official ownership control to 15 percent of GDP by end-decade. Growth last year was 1 percent with the oil price rebound and housing and small business support through a dedicated program to increase domestic demand. Banks remain a weak spot although dollarization has slowed to half the system, according to the central bank. Ratings agency Moody’s in a February survey cited near-term solvency risks with bad loans stuck near 40 percent of the total, and net interest income to stay low among the thirty competitors.  Around 40 percent of non-performing assets are lodged at Halyk and Kazkommertsbank, and they will combine after the government agreed to absorb big problem lines, including outstanding credit to another rescued lender BTA, which defaulted on external bonds. Two small institutions got into trouble in recent months for non-payment and one lost its license as the IMF recommended more interventions and liquidations in the February review.

Ukraine rose 20 percent on the MSCI Index, despite renewed separatist fighting in the east and Russia’s lawsuit in London pressing for $3 billion bond repayment, as another $1 billion was to be released under the IMF arrangement following 5 percent last quarter growth. Trump administration views on the conflict have not been articulated despite expressed desire for warmer Moscow ties, although an oligarch close to former campaign chief Manafort was extradited from Austria to the US on bribery charges. Banking reform has been a clear triumph for the Poroshenko government with half the sector shut down after a comprehensive sweep. The central bank after initial delay took on the country’s wealthiest individual and seized the biggest participant Privatbank after finding a $5 billion capital hole from related-party transactions. Capital controls may be gradually lifted as rules were recently eased on foreign exchange trading. The NPL ratio is 30 percent, with domestic banks in the worst shape and Western and Russian-owned ones just bruised, but Sberbank’s portfolio worsened the past two years under dual crises. The headline capital adequacy number is 15 percent of assets, but masks wide differences in institution health. Profitability has not returned and large maturity mismatches endure with corporate and retail exposures. The parliament guaranteed all state bank deposits last year in a bid to restore confidence but not necessarily fiscal health which is also in the Fund rehabilitation orders.