Kazakhstan’s Avoidance of Bank Collapse and Market Turbulence Discussed at NYC Corporate Bond Forum
EMTA’s Second Annual Corporate Bond Forum in New York took place on September 17, 2008 as uncertainty about the global economy reached new levels. Despite the meltdown in the financial markets—or perhaps because of it—100 investors and other EM professionals eagerly listened to the viewpoints of industry experts.
First, Jonathan Schiffer of Moody’s Investors Service delivered remarks on the Kazakh government and its efforts to support the country’s banking industry during last year’s crisis.
In the second half of 2007, as investors became concerned about the health of Kazakh banks, he explained, the Central Bank adopted a strategy of providing liquidity, stabilizing the tenge and restoring confidence in the market. The government pursed this strategy because it viewed the banking industry as playing an "essential role" in the nation’s overall economic diversification. Also, Schiffer noted, the vast amounts of pension funds in the banking system meant that there was the potential for political instability.
The Kazakh government sought to prop up the banks by altering reserve requirements and concluding an agreement with the country’s six major banks which tied access to their Central Bank reserve accounts to a limitation on their foreign borrowing. The government also attempted to install confidence by floating a rumor of a potential purchase of bank shares (as had been done previously in Hong Kong and Russia), pledging a $4 billion liquidity fund and by promising to buy investment projects and non-performing loans from banks if necessary.
Luckily, Schiffer noted, the vocal and multifaceted response by the government worked. The threat of a potential liquidity problem has since evolved into a non-performing asset issue. None of the country’s major banks were bailed out or taken over; several sold stakes or sought greater shareholder equity injections. Addressing the new issue, the government seems poised to setting up a "bad loan bank" with private sector institutions in order to take bad loans off of commercial loan books.
But would Astana really have been willing and able to bail out the country’s banks if the liquidity situation had deteriorated? Schiffer adapted Teddy Roosevelt’s famous adage on speaking softly. "I think they made a lot of noise… but in the end, they did very little. They kept their hands in their pockets and they did this well," he affirmed.
Thus today combined official and oil fund reserves are on track to surpass banking sector liabilities by year-end; and the outlook, notwithstanding the current global credit crisis, is much improved. The lesson? "It can be done! The government did what it had to do and the results are quite admirable," Schiffer stated.
Schiffer took a series of questions from the floor. As the main sovereign analyst for Russia at Moody’s, he was requested to discuss the causes of recent capital flight. Schiffer noted that capital fleeing Russia is a recurring theme, and it is occurring in an overarching context of a global shortage of liquidity and oil price volatility. He then attributed the most recent episode to additional factors: (1) the recent BP-TNK episode, which reminded investors of the Yukos scandal; (2) former President Putin’s confrontation with the mining company Mechel which suggested that Putin might be open to an administrative approach to price and profit setting and (3) the county’s recent invasion of Georgia and concerns about increased political tensions. "This is my explanation, although there are others," he concluded.
Following Schiffer’s remarks, ING Financial Market’s David Spegel led a panel discussion of leading investors and sell-side analysts. "At last year’s event, we thought Goldilocks was alive and well. The cracks that have formed in the global financial architecture will leave the landscape for credit markets, including EM, forever changed," he summarized in opening remarks before polling panelists for their reactions to unfolding events.
Alfredo Chang of Lehman Brothers Asset Management suggested that the lesson for borrowers is that one needs to move quickly if one has financing needs. He added that the demise of several counterparties in 2008 has left big holes that need to be filled.
Katherine Renfrew (TIAA-CREF) acknowledged that EM assets will inevitably be affected by the global financial crisis. "The nascent local currency-corporate market will definitely be set back," she stated. Deutsche Bank’s Anne Milne seconded comments that the decreasing number of counterparties is a concern for investors, as is the decreased number of potential underwriters for new issues.
The number of distressed issues, defined as assets with spreads of over 1000 bps, has skyrocketed from four last summer to 96 last month and 140 at the time of the Forum, according to Spegel. To what extent is this a reflection of distortions in the market, or is this a valid reflection of fundamentals? ABN Amro’s Aaron Holsberg responded "Clearly this is a bit of both, but the number of those that are really in trouble is small." Holsberg also gave an historical context: "During the Mexican peso crisis, the whole sector was trading at 1000 over, and only two defaulted," he reminded market veterans. Renfrew concurred that despite limited instances where massive spreads were justified on a fundamental basis, "there are some attractively-priced assets out there; you just have to be patient and do your due diligence." She cautioned that buyers should expect protracted volatility.
Holsberg observed that the current crisis is occurring in the context of the strong net creditor positions of Mexico and Brazil, as opposed to earlier EM-focused crises. "It is too early to judge how deep and how long this will be, but this is the first crisis in 15 years that is completely exogenous to Latin America," he stated.
Panelists also discussed how long corporate borrowers can delay refunding. Renfrew believed that many issuers would be able to withstand funding pressures for awhile, especially investment grade-rated issuers. "A lot of savvy managers have been through this before," she noted. Holsberg and Milne agreed that corporates might be able to scale back current projects or obtain financing through other sources, while conceding local markets are probably not adequate sources.
Spegel concluded the panel by polling speakers for their top recommendations, as well as their thoughts on the new issues market. Holsberg argued that with the collapse of the Telmar deal earlier in the week, it was quite possible that there could be no new Latin corporate issues for the rest of 2008. While he had no outright buy recommendations, he would recommend Vitro if the financial markets stabilize yet spreads on the Mexican glass firm’s debt remain at current levels.
Milne warned that the markets were likely to widen further before they stabilized. New issuance was "anyone’s guess" but unlikely to exceed $5 or $10 billion in any case. As for recommendations, "I have no top picks right now, only sells," she admitted. Chang speculated that with managers hoarding cash, there was still a faint possibility of a 4Q rally. "But who knows?" He concurred with previous speakers that any new issuance was likely to be limited and opined that many issuers will rush to secure funding if the new issues window is cracked open.
Spegel agreed that the situation was likely to worsen before stability was restored. Fund managers were likely to protect their cash in light of potential redemptions which would put further downward strain on the new issuance market. He praised CVRD and America Movil as "excellent credits" likely to outperform on market downside. He closed the event by asserting that when the dust settles from the developed market credit crisis, the fundamental and structural drivers that favor EM would allow investors to again see its rising star potential.