There will be calm after the commotion

main conclusions

• In fall 2023, ACRA’s Kazakhstan Financial Stress Index (ACRA SFSI KZ) continued to demonstrate moderate growth. Financial stress generally remains acceptable, however it exceeds the levels that the index reflected in previous years.
• The base risks for the economy for a long time were associated with currency risk triggers, but in October the impact of the refinancing risk trigger became a bit stronger. The current ratio of risks may not be maintained in the future, given the rapid change in trigger estimates due to the dynamics of the tenge exchange rate and the rate spread. In addition, the overall impact of triggers in 2024 is likely to become less noticeable, based on ACRA’s expectations regarding the exchange rate of the national currency and the easing of the monetary policy of the National Bank of Kazakhstan.

FINANCIAL STRESS INDEX PERFORMANCE

The ACRA SFSI KZ Kazakh structural financial stress index continued to grow moderately at the start of October, mainly due to the strengthening of the impact of triggers, and, to a lesser extent, due to the dynamics of the liquidity imbalance in the national currency¹.

ACRA notes that since the start of the year, the Index has been influenced by interest rates at which liquidity was provided in the market, the differential of rates in tenge to rates in foreign currency, lower volatility of the national currency’s exchange rate, and faster growth of the money supply compared to the rate of lending to the economy by the country’s banks. As a result, the ACRA SFSI KZ, while remaining generally at an acceptable level, showed a relative increase in the assessment of stress in the financial sector of Kazakhstan.

In ACRA’s opinion, in December 2023 and next year, the influence of interest expenditures for banks’ liabilities on the index’s performance may decline due a slowdown of inflationary processes and softening of the regulator’s interest rate policy. In addition, lower volatility of the tenge exchange rate and stabilization of the spread of rates in tenge to the base rate somewhat neutralizes the risk of trigger events in the financial sector.

¹ Foreign currency liquidity is present in the calculations of both the currency balance and the maturity balance. The calculation is performed at the exchange rate on the required date, since foreign currency liquidity can be relatively quickly converted into domestic currency liquidity.

Figure 1. ACRA’s Kazakhstan Financial Stress Index

Sources: Kazakh national agencies, ACRA

Figure 2. Financial stress index triggers

CURRENCY IMBALANCE

The imbalance of assets and liabilities in foreign currency in October 2023 was formed under the influence of the financial and non-financial sectors. The negative balance in the non-financial sector continued to be caused by foreign currency debt liabilities and a certain increase in interest expenses. However, the impact of this sector is offset by the receipt of export earnings in foreign currency.

We also note that in August 2023, the mandatory regulation to sell foreign currency earnings in the market was cancelled for quasi-state entities (previously it was set at 50%, lowered to 30%, and then completely removed), which contributes to greater foreign currency earnings retained by entities of the country’s non-financial sector.

A positive balance of net assets, which is characteristic of the public sector and the population, formed in other sectors thanks to coverage of assets.

LIQUIDITY IMBALANCE

By October 2023, the liquidity imbalance had increased slightly. This is explained by liquidity dynamics in the financial sector, which were influenced by the growth of estimated interest expenses and short-term liabilities in this sector during the year.

This trend, apparently, will be observed until the end of 2023 and possibly in H1 2024, since inflation, although slightly decreasing, still remains elevated relative to the regulator’s target, which leads to a prolonged period of high nominal interest rates in the financial sector.

POTENTIAL OF TRIGGER EVENTS

Key financial stress materialization risks

Currency risk in 2022 was the main contributor to the trigger event potential, given the shocks in the foreign exchange market (against the background of the volatility of the Russian ruble), a significant inflow of foreign currency, and unstable foreign exchange earnings of exporters. However, in 2023, the volatility of the tenge exchange rate became more moderate, and last year’s currency shocks faded away.

The refinancing risk, while remaining generally moderate, showed a slight increase during the year, and in October it slightly exceeded the estimate of the first trigger (currency risk). ACRA attributes this to a reduction in the spread between the market and base rates, as well as a gradual easing of monetary policy.

Given the expected stabilization of interest rates and the relatively low volatility of tenge exchange rate pairs, we can conclude that the analyzed triggers are entering a period of more moderate values. This will be reflected in the estimated figures for 2024.

Figure 3. Balance of liquidity by sector (positive values mean a negative imbalance)²

Figure 4. Currency imbalance by sector (positive values mean a negative imbalance)³

³ Balance is the difference between currency debt and interest assets and liabilities; it is shown as a percentage relative to the calculated aggregate debt position of all the specified sectors, non-residents, and the country’s central bank.

appendix

What does the ACRA SFSI KZ show and what are its components?

The ACRA Financial Stress Index for Kazakhstan (ACRA SFSI KZ) assesses the proximity of the country’s financial system to a crisis. Linking different sectors of the economy, the financial system can contribute to the spread of defaults (regardless of the reasons) in some markets to other markets. Large-scale financial crises can lead to disruptions in the real sector of the economy (initially, due to local liquidity crises), which determines their importance.

The ACRA SFSI KZ is based on structural imbalances of the financial system. The Index aggregates information on the financial condition of economic agents and assesses their vulnerability to specific types of risk.

The financial condition of economic agents is studied on the basis of the maturity and currency structure of assets and liabilities at the sector level (financial companies, non-financial companies, the population, and the government). Imbalances in assets and liabilities by maturity and currency can cause a systemic risk when trigger events occur; in case of large imbalances, even weak triggers can result in a systemic crisis. On the contrary, powerful trigger events are not so significant when imbalances are small. The ACRA SFSI KZ includes trigger events such as manifestations of instability in the foreign exchange market and the interbank loan market. The first can impact expectations on the value of foreign exchange cash flows, the second — on the availability of short-term funding.

The Index analyzes two types of imbalances: liquidity imbalance and currency imbalance. The liquidity imbalance indicator evaluates the amount of additional funds required by economic agents in the coming year in order to fully repay short-term debt and pay interest on debt obligations. The currency imbalance indicator evaluates the total demand of various sectors of the economy for foreign currency, not secured by the flow of foreign currency debt assets, expected foreign currency operating income, or cash reserves. In contrast to the liquidity imbalance, the currency imbalance indicator includes both short-term and long-term assets and liabilities.