MINISTRY OF EDUCATION AND SCIENCE

OF THE REPUBLIC OF KAZAKHSTAN

KAZAKH-BRITISH TECHNICAL UNIVERSITY

FINANCE & ECONOMICS FACULTY

Department of Finance and Accounting

APPROVED BY

Dean of Finance &Economics Faculty,

Doctor in Economics, Associate Professor

_____________ G.T. Abdrakhmanova

BACHELOR’S DIPLOMA THESIS

Thesis title: «Global financial crisis and its influence on

Kazakhstan»

Major: 5B050900 «Finance»

Developed by A.K.Pstebayeva

Bachelor Thesis Supervisor

(MSc, Senior Lecturer of

Finance & Accounting Department) A.N.Mamyrbayev

Chair of «Finance and Accounting Department»,

Doctor in Economics, Associate Professor G.T. Abdrakhmanova

Аlmaty 2012

TABLE OF CONTENT

INTRODUCTION………………………………………………………………...3

PART I GLOBAL FINANCIAL CRISIS AND ITS PECULARITIES

1.1 Theoretical framework for the analysis of global financial crisis:

Defining and identifying financial crisis…………………………………....5

1.2 The world financial crisis during 2007-2012: causes and consequences…..11

PART II FINANCIAL CRISIS IN KAZAKHSTAN

2.1 Influence of global financial crisis on Kazakh economy…………………...21

2.2 Anti-crisis measures conducted by National Bank of Kazakhstan during the

crisis………………………………………………………………………....35

PART III CRISIS MANAGEMENT AS A NEW MANAGEMENT PARADIG

3.1 World practice on anti-crisis measures conducted during the global financial

crisis……………………………………………………………………………….49

3.2 Ways of improvement of anti-crisis packages conducted by central banks…..54

CONCLUSION………………………………………………………………………………......62

BIBLIOGRAPHY………………………………………………………………………………..64

APPENDICES

INTRODUCTION

Global Financial Crisis of 2007-2012 has been the worst since the Great

Depression in the 1930s. The financial crisis has had a profound effect, much more

than that anticipated by many. The national borders have been breached and the

ramifications are still being felt far from the epicenter. Although the global

economy is recovering, the confidence in the markets is still weak as market

participants are looking for a direction which is by no means straight forward.

The financial crisis was the event which was not supposed to happen, but it did.

Few economists thought that the U.S. economy would ever experience a systemic

financial crisis again or that it would turn into a global crisis. But, the crisis, which

began in August of 2007, developed into the worst crisis. It has been

unprecedented in its depth and scope. The recession in the United States spread

around the world. It appeared for a time that a new Great Depression was going to

occur, but central banks engaged in extraordinary efforts to stabilize the economy.

As is the common perception, government regulations follow the crisis. Regulatory

bodies analyze the events specific to the crisis and try to bring down formal

regulations which would avoid a similar crisis in the future. After witnessing

trillions of dollars of losses, high unemployment rates and company bankruptcies,

national governments are pressurized and are expected to take immediate and

concrete actions that restore the market confidence. But often, regulatory bodies

come out with regulations which are not the optimal solution. These regulations

can be more than required or sometimes, under political pressure emphasize on

matters that are not the actual causes of the debacle.

The aim of this Bachelor Thesis is to understand the financial crisis, its causes

and the regulatory policies that have come up to avoid a next financial crisis in

Kazakhstan. There has been lot of discussion on the miscreants that spawned the

crisis. This thesis tries to understand the new regulations that have come up in the

world. Also, it tries to identify the similarities and differences in the approaches of

regulatory bodies in different regions. During the research following tasks were

defined:

Developing an understanding of the world financial crisis (understanding the

views of different authors);

Identifying main factors behind the crisis;

Analyzing the impact of financial crisis on world economy, in particular,

Kazakh economy;

Understanding the regulatory changes during the world financial crisis;

Comparison and analysis of regulatory changes;

Providing views on the effectiveness of regulations in improving the current

situation.

This work uses a lot of information available from various books on financial

crisis, conferences and panel discussions, blogs and newspaper articles, statistical

data, websites of central banks and various regulatory bodies.

The Thesis is structured as follows:

Part I provides a theoretical framework for the analysis of world financial crisis

and describes origins of the contemporary financial crisis, disputes reasons and

tries to find out explanations of some questions, such as causality of the crisis, role

and regulation of the systemic risk, etc.

Part II is devoted to the analysis of negative effects on Kazakh economy

including national economy, industrial sector and banking system. The chapter

contains also description of the most important regulatory changes in Kazakhstan.

Part III concludes the Thesis with some after-crisis-to-do and proposals.

PART I GLOBAL FINANCIAL CRISIS AND ITS PECULARITIES

1.1 Theoretical framework for the analysis of global financial crisis:

Defining and identifying financial crisis

The crises in the world economy are supposed to be logical, inevitable, and

periodic. By the way the most are almost always unexpected, in spite of the

warning signs and prevention of persistent analysts and economists. That is what

happened with the current global financial and economic crisis.

When selecting a particular object of study, the authors try to reveal the

traditional notion of a phenomenon on the basis of its internal contents. According

to the glossary crisis − a sharp abrupt fracture, dislocation of the economic life,

which leads to a reduction in the production of goods, increased unemployment,

deterioration of the situation of workers. In a large economic dictionary noted that

"the financial crisis − the deep frustration of the state financial system, followed by

inflation, the volatility of the securities exchange, manifested in the sharp disparity

of income to the expenditure budget, instability and collapse of the exchange rate

of the national currency, mutual non-payments of economic entities, currency

mismatch in circulation requirements of the law of money circulation ".

Philosophical Dictionary interprets "financial crisis" as "the emergence of

conflicts and their resolution, and at the same time, the emergence of new

contradictions", it should be noted that every crisis is a necessary aspect and stage

of development, when the contradictions of the system deteriorated sharply to the

brink of collapse, which allows to detect and in their awareness of their historical

subjects of action, this collapse, and clears the way for updating or eliminating

system for the jump, achieving a new quality system or the transition to a

qualitatively new system, thus accelerating the movement of history, the pace of

historical development. Referred to the financial crisis is quite a variety of

situations in which some financial companies or assets (for example, shares or

bonds) dramatically lose a substantial part of its value. It is clear that the financial

crisis first hit the financial sector. However, due to the fact that the real sector is

closely related to finance, in the end such crises are reflected in all sectors of the

economy and lead to a decline in production, increased unemployment, lower

living standards, etc.

More common definition on financial crisis used in literature is a situation in

which the value of financial institutions or assets drops rapidly. A financial crisis is

often associated with a panic or a run on the banks, in which investors sell off

assets or withdraw money from savings accounts with the expectation that the

value of those assets will drop if they remain at a financial institution. A financial

crisis can come as a result of institutions or assets being overvalued, and can be

exacerbated by investor behavior. A rapid string of sell offs can further result in

lower asset prices or more savings withdrawals. If left unchecked, the crisis can

cause the economy to go into a recession or depression.

According to definition proposed by Frederic S. Mishkin, “A financial crisis is

a disruption to financial markets in which adverse selection and moral hazard

problems become much worse, so that financial markets are unable to efficiently

channel funds to those who have the most productive investment opportunities. A

financial crisis thus results in the inability of financial markets to function

efficiently, which leads to a sharp contraction in economic activity”.

By the way, up until recently, views of financial crises in the literature have

split into two polar camps, those associated with monetarists versus a more eclectic

view put forward by Charles Kindleberger and Hyman Minsky. Monetarists

beginning with Friedman and Schwartz (1963) have linked financial crises with

banking panics. They stress the importance of banking panics because they view

them as a major source of contractions in the money supply which, in turn, have

lead to severe contractions in aggregate economic activity in the United States.

Monetarists do not view as real financial crises events in which, despite a sharp

decline in asset prices and a rise in business failures, there is no potential for a

banking panic and a resulting sharp decline in the money supply. Indeed, Schwartz

(1986) characterizes these situations as "pseudo financial crises". Government

intervention in a pseudo-financial crisis is unnecessary and can indeed be harmful

since it leads to a decrease in economic efficiency because firms that deserve to

fail are bailed out or because it results in excessive money growth that stimulates

inflation.

An opposite view of financial crises is outlined by Kindleberger (1978) and

Minsky (1972) who have a much broader definition of what constitutes a real

financial crisis than monetarists. In their view, financial crises either involve sharp

declines in asset prices, failures of large financial and nonfinancial firms,

deflations or disinflations, disruptions in foreign exchange markets, or some

combination of all of these. Since they perceive any of these disturbances as

having potential serious consequences for the aggregate economy, they advocate a

much expanded role for government intervention when a financial crisis, broadly

defined, occurs. One problem with the Kindleberger-Minsky view of financial

crises is that it does not supply a rigorous theory of what characterizes a financial

crisis, and it thus lends itself to being used too broadly as a justification for

government interventions that might not be beneficial for the economy. Indeed,

this is the basis of Schwartz's (1986) attack on the Kindleberger-Minsky view. On

the other hand, the monetarist view of financial crises is extremely narrow because

it only focuses on bank panics and their affect on the money supply.

The President of the European Central Bank− Mr. Jean Claude Trichet opines

that “financial crises share some commonalities. In particular, crises are associated

with the emergence of euphoria and complacency in financial markets, typically

supported by rapid credit growth and a growing belief that new concepts like

financial innovation or technological advances have rendered old limits on

economic performance obsolete”.

At the same time Trichet acknowledges the fact that each crisis is also unique.

Every crisis has its own characteristics, which make it different from the previous

ones. In order to avoid the next crisis it is essential to understand the causes and

mechanisms behind the current crisis. Every crisis takes its own course in the

financial system and affects specific sectors more than others.

Crisis, being the moment of dialectic development represents process, and as

that, passes some stages of development, namely:

- Stage of formation of crisis;

- Stage of development of crisis till a full maturity;

- Stage of a full maturity of crisis;

- Stage of permission of crisis.

For emergence of crisis the special aggravation of contradictions - not initial,

initial for this system, and not maximum is necessary. Definition of degree of this

aggravation is connected with the concept a measure of relative independence of

the parties of a contradiction, that is that limit of an aggravation of contradictions

behind which crisis begins.

This degree of an aggravation of contradictions is reached at a stage of

formation of crisis. This stage covers the period from emergence of the first

sporadic crisis moments in development of the phenomenon, process and system to

such level of an aggravation of contradictions when there is a possibility of a

quantum leap in the presence of especially favorable circumstances, conditions. In

dialectics necessary and casual accident even more strongly than need, however,

the new reality is already possible, and, means, crisis became, is the fact and a

development.

At the second stage they become crisis develops before complete maturing,

there is a process of further isolation of contrasts, aggravations of dialectic

contradictions, need declares everything itself more persistently, generating more

and more the corresponding accidents, transformation of possibility into reality

becomes more and more necessary.

The third stage - a stage of a full maturity of crisis. The unity of finally stood

apart parties of a contradiction is supported violently, the antagonism reached

extreme development, the old qualitative condition practically reached the top

border of the quantitative measure (the internal limit of system is almost reached),

transition to new quality is objectively possible at any time in the presence of a

maturity of a subjective factor, transformation of possibility of a quantum leap into

reality became crucial need of development.

The fourth stage - a stage of permission of crisis or the negative destructive

side of the crisis. In crisis as its last stage, enters not jump as a whole which

includes not only destruction old, but also creation new but only the negative

destructive part of jump.

It is often said that those who do not remember the past are doomed to repeat

it. With economics it's no different, considering the world has experienced dozens

of crashes and recessions, undoubtedly caused by acquisitive traders and

lawmakers with few memories of the past. So its important review past

crashes−hopefully new management won't repeat them. But during the assessment

of views of crises and their reasons it is necessary to note that they changed in time

together with change of the most social and economic reality. Taking into account

it the point of view of a number of the Russian economists who allocate three

stages in change of views of recurrence in the crisis phenomena is worthy.

The first stage covers the period since the beginning of the XVIII century to the

middle of the 30th of the XX century when judgments prevailed that economic

crises or in general are impossible under capitalism (J. S.Mill, D. Ricardo), or they

carry, only casual character and system of free competition is capable to overcome

independently them (Sismondi, R. Rodbertus, K.Kautsky).

The second stage covers the period from the middle of the 30th to the middle

of the 60th of the XX century. Allocation of this period is connected with Keynes

and first of all with his conclusion that economic crises (the depression is more

exact, stagnation) are inevitable in the conditions of classical capitalism and follow

from the nature of the market inherent in it. Keynes among the western economists

directly declared to one of the first that the capitalist market includes various

manifestations of monopolist and why the price and a salary are nonflexible. As

essentially necessary means of smoothing of problems of crisis and unemployment

Keynes put forward idea of ensuring the state intervention in economy with a view

of stimulation of effective cumulative demand. In research of a factor of recurrence

it is necessary to carry to his merits also the theory of the animator developed by it

which in the subsequent began to be used widely in the analysis of the reasons of

recurrence.

The third stage in research of the reasons of crises is the period from the

middle of the 60th so far. During this period, first, it began to be given particular

attention to differentiation of the internal and external reasons of recurrence of

market economy, and to internal factors it began to be paid primary attention.

Secondly, the position of a number of experts according to which the state in

the developed countries not always aspires to anti-recessionary regulation, to

smoothing of cyclic fluctuations and to stabilization of economic balance was

defined, and carries out quite often so-called about cyclic policy, i.e. provokes and

supports recurrence.

Researches of the nature of crisis in the conditions of state regulation of

economy generated a number of new views and concepts on this problem. Among

them: concepts of «an equilibrium business cycle» and «a political business cycle».

The first reflects development of ideas of monetarism. According to this

concept the state along with many functions inherent in it carries out a role of a

peculiar generator of monetary "shocks" which deduce economic system from an

equilibrium state and thus sustain cyclic fluctuations in public reproduction.

In 70 — the 80th this concept was actively developed by representatives of the

theory of rational expectations. If monetarists consider that the state can provoke a

cycle, using insufficient awareness of people on the true contents and the purposes

of the various directions of state economic policy, supporters of the theory of

rational expectations proceed in the matter from opposite reasons. They consider

that businessmen and the population learned to estimate and distinguish true

motives of decisions of state authorities thanks to occurring information revolution

and can react in due time every time to them in compliance with the benefit. As a

result of the purpose of a state policy remain unrealized, and recession or lifting

accepts more strongly pronounced character.

The second concept (“a political business cycle”) is based that dependence

between an unemployment rate and a rate of inflation is defined by Phillips Curve,

i.e. there is an inverse relationship between two variables: with the low rate of

unemployment, the prices rise rapidly. His supporters believe that the economic

situation within the country essentially influences popularity of ruling party. As the

main economic indicators to which the population reacts, rates of inflation and

standard of unemployment are allocated: than below their levels, other things being

equal more voices will be submitted by that on upcoming elections for ruling party

or the president.

The literature has used different criteria to identify crisis episodes, many of

which fit directly or indirectly in parts of the definition proposed above. A full and

uncontroversial identification is difficult, since it involves a counter-factual

exercise: what would have happened in each particular episode if the financial

sector had remained intact throughout? Instead, literature has identified episodes in

which there are signs of disruption in the financial system, in financial variables, in

macroeconomic variables or in some combination of these without a stronger

causal claim. For example, a direct sign of a large-scale disruption in financial

markets is the presence of widespread bank runs, bank failures or bank

insolvencies. While it is easy to determine whether there was a bank run or a bank

failure, insolvencies are much harder to spot. For this reason, the identification of

banking crises often relies on the assessments of specialists (Caprio and

Klingebiel, 1999; Laeven and Valencia 2008).

Another way to detect disruptions in financial markets is to look at the

behavior of financial flows and stocks. An important example of this strategy is

Calvo (1991), who looks for sudden stops in the inflow of foreign capital.

Mendoza and Terrones (2008) focus instead on credit booms, defined as large

departures of credit to the private sector from its long-term trend. As it turns out,

the peak of these booms oft en coincides with financial crises, especially when

they happen in less developed countries. A third approach is to look for loss in the

value of important classes of assets such as government debt (Reinhart and Rogoff,

2010), stocks and housing (Bordo and Jeanne, 2002). These are assets that

represent an important part of the balance sheet of households and firms, so that a

drop in their value may lead to an interruption in the flow of finance as lenders fear

for the value of the collateral that the borrowers have to offer.

Exchange rate crises can trigger or amplify a financial crisis if financial

institutions have liabilities in foreign currency (Diaz-Alejandro 1984; Calvo and

Talvi 2008). However, not all exchange rate crises turn into financial crisis. For

instance, while the collapse of the European Exchange Rate Mechanism in the

early 90’s was something policy makers at the time did not desire, in most cases

there was no spill over to the broader financial system. In this respect, Kaminsky

and Reinhart (2000) propose that it is useful to focus on episodes in which an

exchange rate and a banking crisis take place simultaneously.

The combination of criteria filters out episodes such as the ERM crisis as well

as episodes in which banking crises did not have any real effect. Lastly, Kehoe and

Prescott (2007) define episodes that they call “Great Depressions of the 20th

Century”. These are occasions in which a country has suffered a precipitous and

persistent output drop. Their definition lacks any reference to disruptions in the

financial sector but, as it turns out, there is a substantial degree of overlap with

financial crises identified in other studies. In spite of the different definitions, there

is a striking amount of agreement on the relevant events. Apart from the Great

Depression, most studies include observations from the Latin American sovereign

debt crisis in the early 80s, the Scandinavian collapse in the early 90s, Japan

throughout the 90s, the Asian crisis in the late 90s and Argentina in 1998-2001.

This coincidence strengthens the presumption that financial crisis represent a

reasonably well-defined economic problem, which is amenable to data collection

and systematic research.

Before discussing what happens during a crisis, it is important to understand

the period preceding a crisis. As the literature shows, this proves to be crucial in

designing and implementing the right set of policies. The identification of clear

antecedent patterns can provide a warning signal to policy makers and suggest

corrections to be taken in order to avoid the worse. While there are several factors

that led to the crisis, the most notable pattern is a period of “boom” in economic

and financial activity that gave rise to stock market and housing bubbles.

A stylized account of the “typical” boom can be reconstructed from the

findings of different papers in the literature. There are regulatory changes, which

allow banks to lend more freely and take more risk (Kaminsky and Reinhart, 2000;

Tornell and Westermann, 2002). What follows is an increase in the supply of credit

by banks, as they lend more relative to their assets and to their capital (Mendoza

and Terrones, 2008). To this increased supply of credit there is a matching increase

in the demand as firms increase their leverage and the government borrows more

heavily (Rogoff and Reinhart, 2010). At the aggregate level, these trends are

apparent in an increase in domestic credit (Mendoza and Terrones, 2008) and in

capital infl ows from abroad

(Rogoff and Reinhart, 2010). Prices of key assets react as house and equity

prices increase (Bordo and Jeanne, 2002; Rogoff and Reinhart 2010) and as the

exchange rate appreciates (Tornell and Westermann, 2002). All the while there is a

boom in economic activity, with an increase in output and investment. As the real

economy starts to lose steam, these trends revert abruptly, and the boom turns into

a crisis (Kaminsky and Reinhart, 2002; Mendoza and Terrones 2008). Two main

strands of the literature on crises attempt to account for the boom preceding the

bust. The first view states that the boom-bust cycle is evidence of excessive

investment and risk taking. In the second view, asset price boom increases liquidity

and facilitates investment. In particular, the boom in asset prices may stem from

self-fulfilling expectations about their value, rendering the boom fragile.

Examining both these strands of economic literature provides a more balanced

view of boom periods.

However, it should be noted that both strands of the literature point out that

booms eventually lead to busts. Despite the fact that there were many signals

reflecting the crisis, economists significantly underestimated the severity of the

downturns. Many economists, Nouriel Roubini among them, argue that some of

the optimism is built into the very machinery, the mathematics, of modern

economic theory. Econometric models typically rely on the assumption that the

near future is likely to be similar to the recent past, and thus it is rare that the

models anticipate breaks in the economy. And if the models can’t foresee a

relatively minor break like a recession, they have even more trouble modeling and

predicting a major rupture like a full-blown financial crisis. Only a handful of

20th-century economists have even bothered to study financial panics. (The most

notable example is probably the late economist Hyman Minksy, of whom Roubini

is an avid reader). As Roubini stated, today “we’re in uncharted territory where

standard economic theory isn’t helpful”.

Finally, literature review showed that economic science did not cause the

crisis. However, many of its theories did offer an intellectual background or some

sort of academic legitimacy to both policy and the markets, and, in the case of the

recent crisis, there was not only a failure of the dominant form of economic

thought but, above all (neoclassicist school, dominant until now, and Keynesian). It

should be noted that there is a problem of selective use of economic theories when

it comes to practical economics and that, in order to be useful, economics ought to

utilize knowledge from other disciplines and take more account of

interdependencies between political and social phenomena.

1.2 The world financial crisis during 2007-2012: causes and consequences

The global financial crisis during 2008-2012 is considered by many economists

to be the worst financial crisis since the Great Depression of the 1930s (Figure 1).

Figure1.The depth and duration of crisises, in terms of quarters

"Black

Monday"

(1987)

"Junk

bonds"

(1989-1990)

The

Mexican

Peco Crisis

(1994-1995)

Asian Crisis

(1997-1999)

IT

company's

crisis (2000-

2001)

Mortgage

crisis (2007-

2009)

1.0

6.0

4.0

2.0

7.0

10.0

4.1

6.6 5.1

1.3

4.1

9.5

Duration until the recovering period Total duration

Note: created by author based on The Global Europe Anticipation Bulletin

Generally, it resulted in the threat of total collapse from large financial

institutions, the bailout of banks by national governments, and downturns in stock

markets around the world. In many areas, the housing market also suffered,

resulting in evictions, foreclosures and prolonged unemployment. The crisis played

a significant role in the failure of key businesses, declines in consumer wealth

estimated in trillions of US dollars, and a downturn in economic activity leading to

the 2008–2012 global recession and contributing to the European sovereign-debt

crisis (Table 1).

Stage Stage characteristic

1st stage:

the middle 2007 –

2008

Crisis developed in the USA and Great Britain,

mentioning financial sector and the housing market.

Periodically there is a capital outflow from emerging

markets, as a result crisis begun in the countries of group

2а which are strongly depend on inflow of the capital and

with an overheat of economy (Kazakhstan, the countries

of Baltic, Ireland, Spain).

2nd

stage:

March 2008-

September 2008

In the USA problems in financial sector became

aggravated, the state was compelled to support Fannie-

Mae and Freddy-Mac. Unemployment rate showed a rapid

increase, despite the fact, that GDP growth rate is quite

stable. Developing (China, India) and some transitional

countries showed steady growth of gross domestic product

and the financial markets. The prices for oil broke records,

the dollar becomes cheaper, decoupling theory was

extended.

3rd

stage:

September 2008 –

February 2009

The sharp phase of crisis begins after bankruptcy of

Lehman Brothers and ING nationalization. A crisis of

confidence in the financial markets. Flight from risks.

Deleveraging. Collapse of international trade. Recession

of gross domestic product or sharp decrease in growth

rates in the majority of the countries of the world. Sharp

rise in price of dollar.

4th

stage:

March-July 2009

Emergence theory of «green sprouts». Stabilization of

falling of gross domestic product in the majority of the

countries of the world. Rally in stock markets. Restoration

of the prices raw materials. Purchases by China of metals

and other raw materials. Dollar reduction of the cost to

other currencies. Bond market restoration. Falling of

volume of bank crediting in the developed countries.

5th

stage

August 2009 -2012

Positive growth rates in the USA and EU. Fast return to

growth in the countries of Asia. In stock markets assets are

considerably overestimated if to estimate on Р/Е. Rally is

slowed down. The markets become unstable waiting for

sovereign or sub-sovereign defaults: restructuring of a

duty of Dubai-world, decrease in a rating of Greece and

etc. Some of the countries are compelled to turn off

support and to cut down the public expenses. The dollar

rises in price again, though isn't so strong, as year before

though isn't so strong, as year before. Greece gets a

€110bn (£93bn) bail-out from other countries using the

euro, and the International Monetary Fund. Euro

continues to fall and the public debt of other members of

EU starts to attract attention (Ireland). EU and IMF

agreed on 85 billion euro bail-out for the Irish Republic.

By the way Portugal recognizes that can’t cope with

problems and asks help from EU. Three countries mostly

affected by the crisis (Greece, Ireland and Portugal)

accumulated 6 percent of Eurozone GDP. However, Fitch

Ratings assumes that Greece finally declares a default.

The Swiss economy appeared on the verge of technical

recession. Low rate of probability that world economy will

recover in 2012-2013.

Table 1. Global financial crisis stages

Note: developed by the author based on BBC News, Bloomberg, The

Economist, Telegraph

To understand what happened in details it is important to be clear about what

has to be explained.

First, the subprime mortgage shock which triggered the crisis was not large.

The crisis was connected to subprime mortgages, a relatively new kind of

mortgage that was designed to make home ownership available to lower‐income

people, but which depended on house prices rising for its efficacy. (Gorton 2010).

When house prices stopped rising, there were expected losses on these mortgages,

many of which had been securitized. But, subprime was not large enough to

explain the crisis. At the time of the crisis there was about $1.2 trillion of subprime

mortgages outstanding, about 80 percent of which had been securitized. Even if

every single one of those mortgages defaulted with no recovery at all, it would not

explain the magnitude of the crisis. Furthermore, the losses on subprime mortgages

have not, in fact, been large. Park (2011) examines trustee reports on February

2010 for 88.6 percent of the notional amount of subprime bonds issued between

2004 and 2007. She calculates the realized principal losses on the $1.9 trillion of

originally AAA/Aaa‐rated subprime bonds issued between 2004 and 2007 to be 17

basis points as of February 2011. The same point is by the Financial Crisis Inquiry

Commission (FCIC) Report (2011: 228‐29) by looking at the ratings on

subprime mortgages.

The FCIC notes that: ”Overall, for 2005 to 2007 vintage tranches of

mortgage‐backed securities originally rated triple‐A, despite the mass downgrades,

only about 10% of Alt‐A and 4% of subprime securities had been ’materially

impaired’‐meaning that losses were imminent or had already been suffered‐by the

end of 2009.” So, if the shock was not large, how did we get a crisis?

Second, at the onset of the crisis all bond prices fell (spreads rose), not just

subprime‐related bonds. In particular, the prices of all manner of asset‐backed

securities fell. Why did the prices of, say, AAA/Aaa credit card asset‐backed

securities nose‐dive when this asset class has nothing to do with subprime

mortgages, and did not experience losses? Moreover, the prices of other securities

falling closely tracked measures of the deterioration of bank counterparty risk,

rather than track prices of subprime mortgages. Financial institutions’ counterparty

risk is usually measured by looking at LIBOR (the London Interbank Offered

Rate), the rate at which large financial institutions lend to each other, minus the

rate on the overnight index swap (OIS), which is taken as the riskless rate. So,

LIBOR minus OIS (LIB‐OIS) measures the risk premium in the interbank market.

Spreads on subprime did not follow this pattern, but rose continuously from

January 2007 (Gorton and Metrick 2012). The measure of interbank counterparty

risk and the spreads on non‐subprime bonds moved together, but they did not move

with subprime spreads.

Finally, any explanation of the financial crisis confronts another issue, namely,

the question of whether the crisis of 2007‐2009 was special, an unlucky

convergence of a number of unique factors. Or, was it at root fundamentally

similar to all the financial crises that have repeatedly occurred throughout the

history of market economies internationally? This question is especially important

for policy considerations.

The evidence discussed here can be summarized as follows:

Figure 3.Origins of world financial crisis

Note: International Institute for Labor Studies

So, the main causes of the global financial recession:

problems with selected by the U.S. model of economic advancement;

extensive development of derivative financial instruments;

prices at commodity exchanges;

inefficient investments risk assessment system, investing in risky

assets - the crisis in subprime.

In 2007 in the United States has badly hit by the burst of the property bubble

and panic spread over the country. Although the economy of United States grew by

0.6 per cent in the last quarter of 2007, down from 4.9 percent in the previous

quarter, day by day worsening scenarios emerge, from escalating oil prices, to a

depreciating dollar and financial institutions’ bailout by the Federal Reserve. Many

economists and policy makers share the view that a subprime‐led recession – i.e.

two consecutive quarters with negative growth – is inevitable and will be much

deeper and longer than the 2001 dot‐com downturn. United States recession will

undoubtedly have an important impact on the world economy.

In the Figure 4 it is clearly seen that world GDP growth rate following the

downturn of US economy. That means US economy has a great impact on the

global economy.

Figure 4.GDP annual growth rates, %

Note: created by author based on World Development Indicators & Global

Development Finance, World Bank Data

The main reason for that high level of economic integration among the

developed country and high foreign investment is the subprime sector of United

1.1

1.8 2.6

3.5 3.1

2.7

1.9

-0.4

-3.5

3.0

1.7

1.7 2.0

2.7

4.0 3.5 4.0

3.9

1.3

-2.2

4.3

2.7

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

United States

States. Except few exception like India, China most of the countries around the

world badly hit by this financial meltdown. In this paper impact of financial crisis

over the major economies of the world revisited to find out the recovery policy and

their effects. During this financial crisis, global economy has suffered, but the

degree of regression varied. After second half of 2009, the global recession

triggered by financial crisis was nearing completion, and economic recovery began

to appear, but the situation of recovery was different in various countries. January

2010 the report of IMF "World Economic Outlook" noted that developed countries

experienced a growth with 3.2% in 2009; after the recession, the economic growth

was expected in 2010 only 2.1%; yet this was in sharp contrast to the emerging

economies, whose growth as a whole in 2010 would reach 6.0% (Appendix 1).

According to "World Economic Outlook" report of 2011, the real economic growth

rate of emerging and developing economies in 2010 has reached 7.1%.

Figure 2. Chart for Dow Jones Industrial Average (INDU)

Note: Bloomberg

Another important indicator is the Balance of Current Account which tells if a

country has a deficit or a surplus. A surplus is indicative of an economy that is a

net creditor to the rest of the world. It shows how much a country is saving as

opposed to investing. This means that the country is providing an abundance of

resources to other economies, and is owed money in return. By providing these

resources abroad, a country with a CAB surplus gives other economies the chance

to increase their productivity while running a deficit. This is referred to as

‘financing a deficit’. A deficit reflects an economy that is a net debtor to the rest

of the world. It is investing more than it is saving and is using resources from other

economies to meet its domestic consumption and investment requirements. A

current account deficit is usually accompanied by depletion in foreign-exchange

assets because those reserves would be used for investment abroad. The deficit

could also signify increased foreign investment in the local market, in which case

the local economy is liable to pay the foreign economy investment income in the

future.

Figure 5.Current account balance (BoP, current US$)

Note: developed by author based on World Development Indicators & Global

Development Finance, World Bank Data

Figure 5 shows that economies such as United States and EU have experienced

large deficits on the back of property and construction booms that proved

unsustainable. Meanwhile, current account surplus in China far above historical

norms financed unsustainable booms elsewhere. As the aggregate euro area current

account position was close to balance, Barnes, Lawson and Radziwill concluded

that much of the lending and borrowing of individual countries had offsetting

positions of other euro area economies.

The financial crisis has had a pervasive impact on the real economy of the EU,

and this in turn led to adverse feedback effects on loan books, asset valuations and

credit supply. But some EU countries have been more vulnerable than others,

reflecting inter alia differences in current account positions, exposure to real estate

bubbles or the presence of a large financial centre. The financial crisis strongly

affected the EU economy from the autumn of 2008 onward through three

transmission channels:

via the connections within the financial system

Although initially the losses mostly originated in the United States, the write-

downs of banks are estimated to be considerately larger in Europe, notably in the

UK and the euro area, than in the US. Also as a result of deleveraging, banks

repatriated capital from the emerging economies of Europe by closing credit lines.

It initially started with the liquidity problem, lack of confidence on counterparties

and uncertainties in prices of complex products, but later developed into solvency

crisis.

via wealth and confidence effects on demand

As the housing prices dropped, households experienced stiffening of lending

standards. Saving increased and the demand for consumer goods decreased. Easy

credit was no more available. Also there was little confidence on the bank

portfolios. These portfolios found no buyers, as investors flocked to safe havens

(government bonds).

via global trade

Business investment and demand for consumer durables - both strongly credit

dependent and trade intensive - had plummeted, due to the unavailability of trade

finance and a faster impact of activity on trade as a result of globalization and the

prevalence of global supply chains.

The world financial crisis - starting from the US subprime mortgage crisis -

spread in all major economies. “UBS quantified their expected recession durations:

the Eurozone's would last two quarters, the United States' would last three quarters,

and the United Kingdom's would last four quarters.” Many experts suggest

systematic money injection in the financial market to pull the global economy. The

main idea was not to break established system very rapidly. Just bring the

confidence of the stakeholders of the market. Developing countries show a mixed

impact from the crisis. Some economies fall from very high growth rate like

Cambodia and Kenya. On the other hand India shows a very good economic

projection with around double digit economic growth. One of the major

economies, China also shows more than double digit economic growth. Arab world

also badly affected by the crisis. They lose around $3 trillion due to crisis.

Unemployment also hit very badly. Worst scenario was reduction in foreign

investment. Due to lack of foreign investment Arabs are failed to continue their

development project create huge layoffs. Euro crisis, 2010 added a new dimension

of the existing financial crisis. Some euro countries are suffering from very high

amount of external debt. Recently a long desired package received by the Greece

government. Some other euro nations are also contracted for mutual financial

assistance which is approved by the euro central bank.

IMF was forecasted in January, 2010 the advanced economies will be exit from

the current recession from middle of 2010. Conversely these countries shows

average GDP growth rate of about 2% in the third quarter of 2009. And emerging

economies accelerated at around 8%. Besides global productions and trade deals

increase indicating recovery. Most of the researcher forecasted continuation of this

recovery in 2010. But the central question is the strength of the recovery as very

high level of unemployment and huge external debt exist in the major economies.

Banking sector was seriously affected by the financial crisis. Profitability was hit at

the bottom. This sector is coming out from the recession but very slowly. The write

down of bad debt is lower than the expected earlier. United States and European

banks recapitalization is progressing while financial instability is the major risk.

Governments should not stop the measures taken in the recession period. And they

have to cautiously plan the exit strategy of intervention.

Figure 6. ROE and ROI indicators, %

Note: Federal Financial Institutions Examination Council, Call Report

So, in 2012 global banking sector will face the following key challenges:

Appropriate pull out strategy formation from the trouble assets.

They have search for growth in the weak market.

Cope up with the new regulatory change and extent of the changes.

They have to give effort to improve governance and risk measurement.

Meeting challenges of core IT system.

At this point of time banking sector shows a mixed outlook. Global bankers

should deal this situation very carefully. Otherwise in this weak recovery scenario

banks may be collapsed.

Thus, it is possible to allocate three important features of the current global

financial crisis.

Firstly, beginning in the conditions of globalization, crisis has unprecedented

character on scales, covering practically all dynamically developing countries and

regions. And it affects those who were most successful in the last decade more

strongly; on the contrary, the stagnant countries and regions suffered from it to a

lesser extent. It is told as a characteristic and for an intra economic situation in the

separate countries, the most serious problems are observed where there was an

economic boom whereas depressive regions almost don't feel changes. It sharply

complicates recovery from the crisis process: not clearly, who can become

"locomotive" of restoration of growth.

Secondly, modern crisis has structural character, that is assumes serious

updating of structure of world economy and its technological base. While it is hard

to say, what structural changes will occur, however redistribution of forces in

branch and regional aspects will be their result.

Thirdly, crisis has innovative character. In recent years it was much told about

importance of innovations, transfer of economy to an innovative way of

development; it also occurred in the financial and economic sphere. Here arose and

quickly financial innovations — new tools of the financial market which as then it

seemed, can create conditions for infinite growth extended. But, as it becomes

clear now, many leaders of the financial world had of them very vague idea that

brought to a double sort to consequences.

Finally, the global financial recession that began in 2007 and covered almost

every country, could be prognosticated. If its consequences and growth were

predicted, its negative and destructive influence on the world and national

economics could be partly neutralized. As any crisis, the financial recession of

2007 had its own preconditions and indicators, showing disproportions in the

global economics and the U.S. financial system’s condition, that the world's rating

agencies and leading economic analysts were not paying attention or were believed

in U.S. indestructibility and firmness. Still, the recession occurred, maybe a little

earlier or later than it should, it’s an occasion for dispute.

PART II FINANCIAL CRISIS IN KAZAKHSTAN

2.1 Influence of global financial crisis on Kazakh economy

After long era of growth the world faces a downturn starting from 2007. This

financial crisis started from American economy spread to all over the world due to

more integration among the economies. GDP growth is the major indicator of the

economic condition.

Following graph exhibits GDP of Kazakhstan during the high time of the

crisis.

Figure 7. GDP of the Republic of Kazakhstan

Note: created by author based on The Agency of statistics of the Republic of

Kazakhstan

Impact of world financial crisis of 2007 was felt in all global financial system.

As a result of the amplified concern concerning solvency of the companies’

emergency measures on permission of financial problems of a number of the

largest financial institutions of the USA and Europe were taken. In particular,

bodies of regulation of the USA and Europe took emergency measures on

stabilization of the markets, including large-scale granting liquidity, immediate

intervention for the purpose of sanitation of weak establishments, increase in a

limit of insurance of deposits and the legislation adopted in the USA on use of

public funds for purchase of unsuccessful assets at banks.

Combination of such factors as growth of losses, reduction of prices of assets

and deepening of economic recession, caused serious concern concerning viability

of more and wider segment of a financial system. Reduction of a share of debt

funds occurring in 2008 it was accelerated and became chaotic that was shown in

sharp reduction of prices of actions of the financial organizations, increase of cost

9.80

13.5

9.8

9.3 9.6 9.7

10.7

8.9

3.3

1.2

7.3 7.5 5.6

17.4

10.1

5.9

11.7

16.1

17.9

21.5

15.5

20

4.7

9.6

16.6

7

0.00

5.00

10.00

15.00

20.00

25.00

0

5000

10000

15000

20000

25000

30000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H2012

GDP, KZT bn Real growth % Deflator,%

of financing and the expenses connected with protection against a default, and also

falling of the prices for assets.

Separate attempts to overcome intensity with liquidity and to solve problems of

the organizations experiencing financial difficulties, didn't allow restoring trust of

participants of the market as these measures couldn't solve widely extended deep

problems.

One of factors of aggravation of a world economic crisis was cardinal change

of the price for oil in the world market in the second half of 2008. The price for oil

in the summer of 2008, having reached 145,7 dollars for barrel, in recent weeks

2008 fell to 37,9 dollars, having shown decrease for 110 dollars in comparison

with the summer price.

Figure 8. Europe Brent Oil Spot Price, USD per barrel

Note: created by author based on Thomson Reuters

Dynamics of the price for oil of a grade of Brent also showed the raised

volatility. In spite of the fact that as a whole price change for 2008 made only 2 %,

quotations fell from value in 145,61 US dollars in July to 93,84 US dollars in

September and further to 59,9 US dollars by the end of October, 2008. Correction

of the prices in the second half of year occurred on a wide range of products;

however from all exchange goods the oil market most tested on itself pressure of

the speculative capital. In contrast, gold prices were reflected a positive trend.

70.76

132.72

39.95

84.82

123.26

95.16

0

20

40

60

80

100

120

140

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J

2007 2008 2009 2010 2011 2012

Figure 9. Spot Gold Price, USD

Note: World Gold Council

All measures connected with decrease in oil production and undertaken for

stabilization of cost of oil, appeared inefficient, and the price for oil continued to

fall till last day 2008. The main reason for sharp falling of the price for oil was

reduction of demand for oil owing to delay of growth rates of economy in the

various countries.

Figure 10. Growth indexes, y-o-y %

Note: created by author based on The Agency of statistics of the Republic of

Kazakhstan

-80

-60

-40

-20

0

20

40

60

80

-60

-40

-20

0

20

40

60

80

100

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

2008 2009 2010 2011 2012

Industry Transportation Agriculture

Construction Retail trade Investment

It should be noted that GDP per capita has a positive correlation with oil prices.

Kazakh economy is much based on extractive industry, that’s why country was

affected directly during the crisis.

Figure 11.Correlation between GDP per capita and Oil Prices in Kazakhstan

Note: developed by author based on The Agency of statistics of the Republic of

Kazakhstan

The economy continued to recover strongly from the impacts of the global

financial and economic crisis of 2008-2009. Real GDP grew by 7.5 percent in

2011, for the second year in a row (over 1.2 percent registered in 2009). Growth in

2010-11 reflected a demand-driven recovery in capacity utilization in non-oil

sectors from the low levels realized during the crisis. A rebound in agricultural

output from the drought of 2010 also contributed to the economic expansion. A

stronger external position influenced the recent upgrades in Kazakhstan’s

sovereign credit ratings. Kazakhstan, as a large oil exporter, has benefited from

higher commodity prices, and witnessed its external trade and current account

balance improved significantly last year. In 2011, the current account surplus at

US$ 14 billion (equivalent to 7.6 percent of GDP) was 6 times higher than in 2010.

Total official international monetary and fiscal reserves rose by 23 percent last

year, reaching US$ 73 billion (40 percent of GDP) by the end of 2011. This

upward trend continued over the first quarter of 2012, reflecting increase in oil

prices. Consequently, a strengthened sovereign balance sheet encouraged the rating

agencies Standard & Poor’s and Fitch to upgrade Kazakhstan’s foreign currency

sovereign credit rating by one notch, to BBB+ (stable outlook) and BBB (positive

outlook, with a country ceiling of BBB+), respectively.

Prompt growth of the commodity prices in 2007 proceeded and in 2008. So, in

February, 2008 the highest rise in prices for raw materials for the last decades was

3,771

5,292

6,772

8,514 7,165

9,070

11,357

50.0

58.3 64.2

91.5

53.48

71.21

87.48

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

0

2,000

4,000

6,000

8,000

10,000

12,000

2005 2006 2007 2008 2009 2010 2011

GDP per capita,$ Annual crude oil price, $ per barrel

fixed - dynamics of an index of Reuters/Jefferies hard currency showed the

maximum historical gain in 12 % in a month. At the same time, growth of

volatility of the prices, fed by the speculative capital, finally, was transformed to

sharp correction in the 3rd quarter of the current year, connected with need of

fixing of profit, reduction of liquidity and fears of delay of growth of world

economy.

Figure 12. Housing price in Almaty (USD per sq.meter)

Note: developed by author based on krisha.kz

The price of the main trigger of inflation in developing countries in 2007 -

wheat - also showed similar dynamics. In 2008 it was decreased by 40%.

In turn gradual correction of the prices "blown up" owing to speculative moods

on assets was observed and in the markets of real estate of the various countries of

the world.

Figure 13. Inflation, y-o-y,%

Note: developed by author based on The Agency of statistics of the Republic of

Kazakhstan

17.6%

-23.5%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

0

500

1000

1500

2000

2500

3000

3500

4000

The asking average housing prices per sq. m., USD (RHS)

60.3

28.7

11.2

1.9

17.8 9.8

6.4 6.6 6.8 6.7 7.5

8.4

18.8

9.5

6.2 7.8 7.4 6

0

10

20

30

40

50

60

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

exp

Tendencies of the market of real estate in developing countries developed in

different directions. One country endure some recession in the real estate market as

a result of limitation of external resources which last year’s went in large volumes,

including on the real estate market. Other countries showed a high rise in prices for

the real estate, connected first of all with preservation of demand for housing, an

overflowing of resources from stock markets on the real estate market owing to

world financial crisis, and also decrease in volumes of the new offer owing to

complication of attraction by builders of extra financing.

The combination of numerous negative shocks owing to development of global

financial crisis since the beginning of 2008 brought with an accruing tendency to

gradual delay, and then business recession in many countries of the world.

Gradual manifestation of such consequences of development of crisis as:

- reduction of prices of real estate;

- a considerable rise in prices of the exchange goods in the world market;

- toughening of credit conditions;

- decrease in level of consumer expenses and investments;

- substantial damages and bankruptcies of financial institutions;

- gradual decrease in internal demand and business activity.

At the same time, in the third quarter 2008 in connection with decrease in

economic activity and demand reduction worldwide owing to aggravation of

financial crisis, and also a sharp turn of the prices in the world commodity markets,

inflationary pressure in the world everywhere started to decrease that should is

brightly expressed in 2009.

Figure 14. Money aggregates

Note: developed by author according to The National Bank of Kazakhstan

Nowadays one of the important and urgent problems of economic development

of Kazakhstan is the efficiency of functioning of the bank system. Activity and

stability of the latter is not only a key condition for the existence, but the most

important factor of economic development.

The bank system is the fastest growing sector of the economy of

Kazakhstan. The level of penetration in the economy (about 90% of GDP) is

comparable with indicators of the European Union’s countries.

Kazakhstan's banking system, felt the crisis in 2007, particularly hard affected

during the crisis period of 2008-2011. In many respects it has been connected with

fundamental lacks of its institutional basis, the main things from which were:

inadequacy of the mechanism of is standard-legal regulation; reliance on external

funding and crediting of mainly risk branches (basically, building and trade);

absence of competent system of risk assessment and quality of a loan portfolio.

All these factors in aggregate with an ill-considered risk management policy of

a number of banks had a negative effect and set the banking system on the brink of

default. As a result of massive government support of capital and liquidity

managed to avoid bankruptcy, to solve the problem of tinning of external debts,

restructure the debt of troubled banks and stabilize the banking sector.

At the moment, there are 39 banks operating in Kazakhstan, 22 of them have

large foreign shareholders, 17 banks are subsidiaries of foreign banks. Banks of

Kazakhstan were closed in the structure of the internal market: the dominant

sources of development- equity capital and deposits of residents.

For four years (Q1. 2005 - Q1. 2008), the banks increased their foreign

borrowing from $ 8.6 billion to 45.1 billion dollars. Then a dramatic decline came -

foreign loans of the banking sector declined to 19.6 billion at the first quarter of

2011. This year Kazakh banks have to pay the debt in the amount of $ 4.2 billion.

The entrance of foreign credit in the economy is open, not trough Kazakhstan’s

institutions, but through wholly owned subsidiaries of large foreign banks.

In the three years of crisis and post-crisis period, the scale of the assets of

subsidiary banks in the sector has grown considerably. Since January 2008, the

share of subsidiaries of foreign banks by assets of all Second Tier Banks (STB)

Kazakhstan has changed from 12.4% to 18.6%. Now there is a tendency for larger-

scale presence of foreign institutions in the banking sector. The assets of STB

increased by only 2.3%, and assets of subsidiary banks by 5.5%, during the five

months of this year.

If the share of subsidiaries of foreign banks by assets of all STB is less than a

fifth, in the context of standard assets of banks, this group has more massive share

of 26.8% (12.69 billion dollars in absolute terms) of the entire banking sector. The

value of high-quality assets of subsidiaries increased on 5.3% (May 2010-2011).

Better Portfolios "subsidiary banks" allow them to grow more mobile in the

Kazakh market, as they spend much less on a redundancy.

It should be noted that the standard assets grow in this group also faster than

the market. On the whole the banking sector has reduced the standard assets by

11.2%, and in a group of subsidiaries of foreign banks standard assets increased by

10.7%.

The main reason is debt of banks to foreign financial institutions. And due to

the crisis the burden of the debt became more complicated. First of all recent

devaluation of the national currency tenge in February has inauspicious influenced

on this foreign obligation. According to the estimation of the rating agency

“Moody’s” devaluation provoked a growth of assets’ riskiness by 54% and

increase of debt in fact by 25-30%. Really repayment of external owing became

more expensive as most of operations with customers in banks are conducted in

tenge. Thus banks had to pay off $12 billion - 1440 billion of tenge (120

KZT/USD) and now due to devaluation banks must to repay 1800 billion of tenge

(150 KZT/USD).

Figure 15. Total External debt of Kazakhstan including Banks

Note: developed by author according to The National Bank of Kazakhstan

The strong external position also helped the central bank to maintain exchange

rate stability, while declining inflation enabled it to cut its policy rate. Although at

the beginning of 2011 the authorities announced a switch to a managed float, in

practice the central bank implicitly maintained a narrow band of ± 1 percent

around 146.5 tenge against the US dollar. Kazakhstan’s headline inflation slowed

to 4.6 percent (y/y) in March 2012 from 7.4 percent in December 2011. Falling

food price inflation was the main contributor to this deceleration. As inflationary

pressures have eased, the central bank cut its official refinancing rate from 7.5

percent to 6.5 percent in April 2012.

Establishment of the customs union between Kazakhstan, Russia and Belarus

in January 1, 2010 marked a major change in the path of regional integration with

important implications for Kazakhstan. The establishment of a customs union

entailed a doubling of the weighted average tariff and an increase in tariff

dispersal. The rise in protection will have efficiency costs in a resource-exporting

country, where diversification is reliant on international integration. However, the

impact of greater protection may be offset by improvements in trade facilitation

and reductions in non-tariff barriers.

Figure 16. Exchange rate

Note: created by author based on The National Bank of Kazakhstan

The credit market for the year (from May 2010 to May of the current) is

declining by 1.2%, banks are subsidiaries of foreign banks increased their contrast

to lend 14.4%, which was more than 8.83 billion dollars. Thus, the share of this

group in the credit market has grown over the year by almost 2% and 14% of the

total mass of loans.

Funds of the subsidiary banks are successful in the Kazakh market, attracted

18.6% of total deposits. Over the past five months deposit market grew by 2.3%

from 6960 to 7121 billion, the number of deposits in the accounts of subsidiaries

increased from 1288 to 1331 billion tenge. Accounts of subsidiaries of foreign

banking institutions concentrated on deposits over $ 9.13 billion, with gains for the

year amounted to over 1.27 billion dollars.

Despite some stabilization, the threats of destabilization, as external and

internal to the Kazakh banking system remain constant.

The recent trends reveal some signs of domestic credit market revival. In 2011,

the outstanding credit provided by the banking sector to the economy was 15.6

percent higher than in 2010, with new lending 52 percent higher than a year ago.

At the same time, lending in foreign currency is going down. The share of lending

in foreign currency has declined to 36 percent reflecting in part regulatory efforts

to curb foreign currency lending. If oil prices keep rising, they will put an upward

pressure on the Kazakh tenge that may strengthen the de-dollarization trend.

The Kazakh banking system has been strongly affected by the global financial

crisis. Reliance on external funds by the largest banks under conditions of limited

refinancing opportunities and narrow domestic markets have led to slower credit

activities and declining financial indicators for all the banks. Since the autumn of

2008 declining revenue and worsening asset quality became the dominant trends in

the Kazakhstan banking system.

Figure 17. International Reserves and National Oil Fund Assets

Note: created by author based on The National Bank of Kazakhstan

First of all, external threats come from the world financial system, stability of

which is still rather weak, even some recovery of world economy. Another external

threat is connected with preservation of the high level of sensitivity of the banking

system to price fluctuations of export commodity and changes in the emerging

market risk perception.

Figure 18. State budget, KZT bn

Note: developed by author based on Ministry of Economic Development and

Trade

821.2 1022.3 2098.5

2338.0

2887.9

4034.4

3505.3

4299.1

5370.8

3224.5

820 1063 1946.1

2150.6

2678.3

3394.1

3 746.8

4457.2

5423.3

2849.0

-700

-600

-500

-400

-300

-200

-100

0

100

200

0

1000

2000

3000

4000

5000

6000

2003 2004 2005 2006 2007 2008 2009 2010 2011 1H2012

revenue expenditures surplus/deficit

First of all, banks carry out a reorientation on short-term loans in order to

ensure the quick assets turnover and maintain the liquidity for external debt

repayment. Also because of borrowers’ insolvency most of banks have to sell their

collateral, cut down expenses: reduce the number of staff, shut down or merge

branches.

The second way is a support of the government. According to the crisis

management program the government of Kazakhstan supports the banking system,

small and medium enterprises, and agricultural sector of the country by allocation

the appointed sum of money.

There is internal credibility along with the danger of external threats. Average

rating of banks is in category B (not investment grade). Currently, bank financing

is limited to providing short-term resources to finance working capital and

restructure the existing debts of enterprises. This low-key approach to long-term

financing is explained by 2 main factors - the lack of long resources to finance

projects and the lack of quality borrowers.

Another major internal threat to the banking system is based on the quality of

loan portfolio. Deterioration in the quality of loan portfolio and the restructuring of

its receivables firstly affect the financial condition. Restructuring of all bank loan

portfolio, no doubt, will question the existence of individual banks, which are

either closed or conduct a merger with the more successful competitors.

Figure 19. Banks’ Lending Flows and Stock

Note: The World Bank

The process of restructuring the loan portfolio partially is prevented by the tax

laws. According to Tax Code, cutoff of bad loans from the balance causes the

return of provisions, resulting in an additional tax. Now the Government is

considering the abolition of the provision and appropriation of amendments to the

Tax Code of RK.

Another obstacle to getting rid of nonperforming loans is the absence of market

mechanisms to work with liens, transited to private banks after the borrower’s

defaults.

Thus, the implementation of a complex bank resolution, aimed at reducing the

share of nonperforming loans, is inhibited by the current system of tax

administration, legal and regulatory frameworks and lack of market sales of low-

quality assets.

Figure 20. Banks’ ROA and ROE

Note: developed by author according to Committee for the control under the

NBK

An important condition of renovation is a gradual reduction of state support of

the banking sector. Of course, the withdrawal of deposits of state structures from

banks, the reduction of equity should be commensurate with the need to maintain

economic growth. It is necessary to maintain a balance between keeping inflation

under control and support the banking sector.

After a period of continued growth, supported mainly by the inflow of foreign

loans, growth has now slowed substantially, from a 30% increase in 2007 to

negative 5% in 2008. During the global liquidity crisis Kazakh banks did not have

any alternative opportunities to draw relatively cheap foreign funds. In the first half

of 2009 the banking trends were mixed regarding changes in asset quality and

other important indicators.

If we look at the dynamics before the start of 2009 changes in the indicators

were due to external funding, but in late 2008 early 2009 they were affected mainly

by the decline in asset quality and government anti-crisis measures to support the

economy and the banking sector. In the first quarter of 2009 the indicators were

primarily affected by the actions of the government and state funds to support the

banking system by adding capital to a number of systemic banks. In particular, the

charter capital of Kazcommercebank and Halyk bank was increased by 25%; the

government also significantly boosted the capital of BTA bank and Alliance bank.

Unresolved non-performing loans (NPLs) are now the biggest concern for the

financial sector and a significant problem for the private sector.

Figure 21. Banks’ Non-performing Loans and Provisions

Note: The World Bank

As of end-February 2012, banks recognized NPLs in the amount of US$ 24

billion (33.8 percent of total loans, or 13 percent of GDP), but informal estimates

place NPL figures at higher levels. Half of NPLs are concentrated in the three

failed and nationalized banks. Thirty one percent of the credit portfolio has been

set aside as provisioning against non-performing loans. While this provisioning

may seem sufficient to maintain stability in the financial sector, these resources

that could have been used for new lending are being tied up. This impedes private

sector enterprises from making new investments and obtaining sufficient working

capital. At the same time, high loan losses have made banks overly risk averse,

demanding high levels of collateral and reducing the tenor and volume of credit

available. Limited tenors reduce firms' ability to finance long-term capital

investments required to support the country's economic diversification objectives.

Under these conditions, when the search of tools providing sufficiency of bank

capital is complicated, funding sources are reduced and government control is

tightened, significant controlled access to credit, increases the uncertainty in the

Kazakh banking system and risks to economic growth downsides. This means that

today the sources of reviving the Kazakh economy are mainly outside of the

banking sector. And if the bank system grew faster than real sector of the economy

in the pre-crisis, but today it hampers its development and does not meet the needs.

So, the main factors affecting the banking system in the short and medium term

are:

Further decline in the quality of assets;

Decline in revenue and an increase in the number of unprofitable banks;

Less interest from foreign investors in Kazakhstan’s banking system due to

the fact that a number of banks stopped making payments on external liabilities

and started restructuring;

Growth of risks due to noneconomic regulation of the banking system from

the government.

To counter the phenomena of bank stagnation must change their business

model and follow reforming directions:

Conducting upgrade (modernization, renovation, re-evaluation) of the

business model of banking activities. Adaptation principles should be established

in business model, continuously evaluating in compliance with the new economic

conditions.

Development of new strategies to reach markets. Optimization requires the

presence in the markets of different banking products and (or) services, expanding

their range and increase market supply, including at regional level.

Optimization of operational flexibility. Necessary to increase the efficiency

of banking due to the flexibility of the structure and optimal use of resources, the

use of LIN-approach (lean production, the philosophy of "lean production") to

create a new operating system.

Improving the quality of risk management process. It should change the

quality of implementation of the regulatory requirements set market risk

assessment and develop a robust integrated system of internal control and

planning.

Optimizing access to sources of funding and location. The growing

importance of domestic savings in the condition of limited financing dictates the

need to find new ways to access funding and allocation of funds to provide greater

flexibility and stability.

Strengthening membership of the top managers. It is necessary to maintain

and keep the team leaders who can work in difficult economic and organizational

conditions, and ensure the effective use of independent directors.

Strengthening the system of corporate governance principles, approaching to

the international standards. Also it is necessary to restore and maintain the

confidence of international financial institutions, potential investors and customers

by ensuring the transparency of financial and non-financial information and

improve the communication process.

Today experience of crisis period and post-crisis development require

transition of bank system to a qualitatively new model of activity, which becomes

the foundation for strengthening the regulatory role of state in the country's

financial sector, based on the principles of state-private partnership, counter

recurrence, legislative regulation.

The Government's strategy for diversification and competitiveness of the

economy is anchored in the recognition of the paramount role of the private sector.

Though diversification towards non-extractive tradable has been part and parcel of

Kazakhstan’s development strategy, actual success has so far been limited. The

economy was, and remains highly resource-dependent, with manufacturing

accounting for 11 percent and agriculture for 5 percent of GDP. The diversification

agenda proved difficult in the face of booming commodity prices leading into the

crisis. The GoK post-crisis recovery program puts a major emphasis on increasing

the non-oil sectors’ contribution to growth. That’s why business is likely to be

more optimistic as a result of a huge support from the Government.

Figure 22. The balance of business confidence, %

Note: developed by author according to The Agency of statistics of the

Republic of Kazakhstan

So, Kazakhstan has rebounded well from the economic recession that affected

the country in the first half of 2009. Rising commodity prices and the expansion of

the oil industry have helped to revive the economy with continued growth

predicted, barring a dramatic decline in oil prices. However, most non-resource

sectors of the economy continue to suffer from low productivity and

competitiveness, and the country remains vulnerable to commodity price

fluctuations.

2.2 Anti-crisis measures conducted by the National Bank of Kazakhstan

during the crisis

The national Bank of the Republic of Kazakhstan represents the uniform

centralized structure with the vertical scheme of submission. Legal status of

National Bank of the Republic of Kazakhstan is fixed in the Law of the Republic

of Kazakhstan from March 30, 1995 of No. 2155 «About National Bank of the

Republic of Kazakhstan» according to which the central bank of Kazakhstan

within provided to it economic acts of powers is independent in the activity.

Bodies of representative and executive power haven't the right to interfere with

activities of National Bank of Kazakhstan, its branches, representations and the

organizations for realization of its legislatively fixed powers.

The national Bank of Kazakhstan coordinates the activity with the Government

of the Republic of Kazakhstan. The national Bank and the Government are obliged

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to inform each other on prospective actions and the reached results having nation-

wide value, and to carry out regular consultations.

The national Bank of Kazakhstan considers economic policy of the

Government in the activity and promotes its realization if it doesn't contradict

performance of its main functions and monetary policy implementation. The

chairman of National Bank or one of his deputies has the right to participate in

Government meetings with the right of an advisory vote. The government doesn't

bear responsibility according to obligations of National Bank, also as well as the

National Bank doesn't bear responsibility according to Government obligations,

except for cases when it takes up such responsibility.

Main objective of National Bank of Kazakhstan is ensuring stability of the

prices to the Republic of Kazakhstan. For realization of a main objective the

following tasks are assigned to National Bank:

- development and carrying out monetary policy of the state;

- ensuring functioning of payment systems;

- implementation of currency regulation and currency control;

- assistance to ensuring stability of a financial system.

According to the Law of the Republic of Kazakhstan No. 2155, the monetary

policy is carried out by National Bank of Kazakhstan by establishment:

- official rate of refinancing;

- levels of rates of compensation on the main operations of a monetary policy;

- standards of the minimum reserve requirements;

- in exceptional cases direct quantitative restrictions on level and volumes of

separate types of operations.

With a view of monetary policy realization the National Bank of Kazakhstan

carries out the following types of operations: granting loans, reception of deposits,

currency interventions, release of short-term notes of National Bank of

Kazakhstan, purchase and sale of the state and other securities, including with the

right of return repayment, an inventory of commercial bills, other transactions of

the decision of Board of National Bank of Kazakhstan.

In 2004 according to the Decree of the President of the Republic of Kazakhstan

from December 31, 2003 of No. 1270 «About further improvement of system of

public administration of the Republic of Kazakhstan» from system of National

Bank of Kazakhstan the independent structure - Agency of the Republic of

Kazakhstan on regulation and supervision of activity of the financial market and

the financial organizations which together with which the National Bank of

Kazakhstan carries out control and supervising functions behind a banking system

of the republic was allocated.

Since August, 2007, the RK National Bank carried out a number of measures

for support of liquidity of a banking system. From August to December, 2007

intensive support of BVU was carried out to the period by granting short-term

liquidity in the form of return a repo, the SWAP, the SWAP on the security of

MRT, currency the SWAP.

In August, 2007 the RK National Bank made changes to Rules about the

minimum reserve requirements, the bases of reserve obligations directed on

reduction and expansion of structure of reserve assets that should allow to banks of

the second level to liberate money in addition.

In 2008 the RK National Bank the list of mortgaging providing on refinancing

operations was twice essentially expanded.

Possibility of negative consequences as a result of influence of «effect of

infection» caused of change of prudentially standards for the purpose of decrease

in level of risks of a financial system. For this reason of AFN accepted a number of

the measures directed on reduction of the external economic risks, risks of liquidity

and sufficiency of the capital.

Besides, on October 23 the current year the Law of the Republic of Kazakhstan

No. 72-IV «Was passed about modification and additions in some acts of the

Republic of Kazakhstan concerning stability of a financial system». This Law is

directed on improvement of mechanisms of early diagnostics of risks in a financial

system, expansion of competence of authorized body in case of default by

shareholders of the financial organizations of requirements of authorized body on

improvement of a financial condition of the financial organization; increase of

requirements to executives and large participants of the financial organization with

a view of increase in responsibility of the financial organization for the accepted

obligations. It is necessary to allocate especially the following norms directed on

maintenance of financial stability:

- increase of the sum of guaranteed compensation on deposits of individuals to

1 million tenge and as a stabilizing measure to 5 million tenge till January 1, 2012

is provided.

- the ban for the 2nd

tier banks which do not have large participants -

individuals, or parental bank, and also the holding company, having a certain rating

of one of the rating agencies which list and the minimum demanded rating is

established by authorized body, on implementation of reception of deposits of

individuals, opening of accounts of individuals is provided. Introduction of this

ban is provided since 01.01.2010.

- the ban on change of rates of compensation which acts within three years

from the date of official publication of the specified law (24.10.2008г is provided),

i.e. 2nd

tier banks and the organizations which are carrying out separate types of

bank operations, the concluded contracts of a bank loan (including a mortgage

loan) with the individuals, having not the right to change a compensation rate

above the size established by conditions of contracts during specified term.

- the norm according to which the Government of the Republic of Kazakhstan

in coordination with authorized body has the right to make the decision on

acquisition by the Government or national management company of the declared

stocks of 2nd

tier banks at a rate of not less than ten percent from total of the placed

actions with a view of early response to the arisen problems in 2nd

tier banks

expressed in essential violation of prudentially standards and (or) other obligatory

norms to observance and limits is provided. In case of improvement of a financial

condition of 2nd

tier banks, the Government takes measures for implementation of

the acquired stocks of 2nd

tier banks.

Deterioration of an internal environment and decrease in cumulative demand

were negatively reflected in activity of non-primary branches of economy, having

reduced their profitability and solvency. More all suffered those branches of

economy which more others need continuous replenishment of current assets at the

expense of crediting: trade, services, construction sector. The negative effect of

crisis also noticeably affected the enterprises of small and medium business. These

factors led to fast deterioration of credit portfolios of the majority of the banks,

lowered rates only in the second half of 2009.

In 2009 the steady tendency of decrease in inflation was noted. Low business

activity, stagnation of credit activity of banks, low growth rates of the monetary

income of the population, a limited consumer demand served as major factors of

decrease in an inflationary background in economy.

Following the results of 2009 inflation developed at level of 6,2 % (drawing 2)

that in 1,5 times it is less in comparison with inflation of 2008 (December, 2008 by

December, 2007 of-9,5 %). Mid-annual inflation made 7,3 %.

In 2009 delay of annual inflation occurred against decrease in growth rates of

the prices for foodstuff and paid services whereas growth rates of the prices for

nonfoods were accelerated. Food stuff became more expensive for 3,0 % (in 2008 -

for 10,8 %), nonfoods - for 8,6 % (for 5,7 %), paid services to the population - for

8,4 % (for 11,4 %).

Delay of inflationary processes in 2009 allowed National Bank to pursue a

monetary policy directed on ensuring of stability of an exchange rate of tenge and

stability of financial sector of the country.

Figure 23. Tenge Devaluation and Maintenance of the Exchange Rate Stability

Note: National Bank of Kazakhstan

As shown above, in February, 2009 the National Bank established a new

corridor of an exchange rate of tenge at level of 150 tenge for dollars +/-3 %. One-

stage change of an exchange rate allowed to reduce considerably devaluation

expectations, to improve a condition of the balance of payments, to keep gold and

foreign exchange reserves of National Bank.

In the domestic currency market in 2009 the National Bank acted mainly as the

seller of foreign currency. For 2009 net - sale of National Bank in the domestic

currency market made 5,4 bln. dollars. Thus, if from January to October the

National Bank provided the offer of foreign currency in domestic market, in

November-December, 2009 the National Bank performed operations on purchase

of foreign currency in the domestic currency market which volume during this

period made about 4 bln. dollars.

In 2009 the National Bank took additional measures for ensuring stability in

the financial market. Measures for granting to banks of short-term tenge liquidity,

and also for improvement of system of refinancing of banks by National Bank

were taken.

In 2009 the National Bank provided refinancing loans to banks by means of

operations of return of a repo and in January-February, 2009 - operations SWAPS.

In March, 2009 the National Bank stopped carrying out operations a currency

SWAP and the SWAP on the security of the remains of money on correspondent

accounts of banks in National Bank(Figure 24 ).

Figure 24. NBK’s refinancing operations (turnover)

Note: National Bank of Kazakhstan

As of the end of 2009 the volume outstanding banks of debt to National Bank

on operations of return of a repo made 404,9 billion tenge.

The list of mortgaging providing was corrected at carrying out operations of

return by a repo which includes the state securities, bonds of the national

companies of Kazakhstan, the foreign states, the international financial

organizations, JSC Kazakh mortgage company, JSC Kazakhstan Development

Bank, JSC Eurasian Bank of Development, and also debt securities of the banks

which issuers are in direct 100 % of a property at the state or JSC National Welfare

Fund Samruk-Kazyna, or JSC Kazagro.

As a result of the measures undertaken by National Bank for 2008-2009 on

ensuring stability of financial sector the situation with tenge liquidity in the

banking sector considerably improved. As a result, in the second half of 2009

demand increased from banks by operations of National Bank on liquidity

withdrawal. In spite of the fact that for 2009 in comparison with 2008 the volume

of the let-out short-term notes decreased in 2,0 times and made 1,4 trillion tenge,

their volume in the address in 2009 grew by 51,6 % to 473,3 billion tenge.

Withdrawal of liquidity of banks on 1,3 trillion tenge for 2009 became a result

of operations of National Bank in domestic market.

Also National Bank involved deposits of the Ministry of Finance in tenge for

total amount of 5 732,8 billion tenge on an average rate of 0,25 % per annum,

average term of attraction made 7 days.

In 2009 the National Bank gradually lowered an official rate of refinancing

from 10,5 % to historically minimum level - 7,0 %.

Since March 3, 2009 standards of the minimum reserve requirements for banks

were lowered from 2 % to 1,5 % according to internal obligations of bank and

from 3 % to 2,5 % according to other obligations of bank. This decrease by an

assessment liberated about 50 billion tenge of liquidity. Since November 30, 2009

with a view of regulation of short-term liquidity for the banks which are in process

of restructuring, separate standards of the minimum reserve requirements at a rate

of 0 % for internal obligations and 0 % for other obligations of bank were

established [26].

Increase in the remains on correspondent accounts of banks in foreign currency

in National Bank and receipts of currency into Government accounts in National

Bank were partially neutralized by operations on currency sale in the domestic

currency market and operations on service of an external debt of the Government.

As a result pure foreign currency reserves (hard currency) for 2009 grew by 13,0

%. Assets in gold as a result of growth of its price in the world markets grew by

25,0 %.

In 2009 systematic monitoring of compliance of activity of external managing

directors by assets of National fund to restrictions of investment strategy was

made.

Control of observance of the requirements established in Investment strategy

on management of gold and exchange assets was daily carried out.

Profitability calculation by gold and exchange assets of National Bank and the

assets of National fund being in independent and external management was daily

carried out.

Within implementation of the Joint action plan the National Bank signed

contracts of purchase and sale of bonds of JSC National Welfare Fund Samruk-

Kazyna from February 2, 2009 and JSC Kazagro from February 18, 2009, and

carried out repayment of these bonds for the sum of 480 billion tenge and 120

billion tenge respectively. Also, according to point 1 of the Minutes of Council for

management of National fund No. 01-7.14 from November 23, 2009 the National

Bank signed the contract of purchase and sale of bonds of JSC FNB Samruk-

Kazyna from December 8, 2009 and carried out repayment of these bonds for the

sum of 150 billion tenge.

According to the resolution of Board of National Bank from January 28, 2009

of No. 6, for the purpose of minimization of risks, and also increase of liquidity of

assets of National fund since April 1, 2009 average term before repayment of

securities entering into a reference portfolio for a portfolio of bonds was reduced.

So it was changed with:

Merrill Lynch US Treasury (GOQO) - 45 %,

Merrill Lynch EMU Direct Governments (EGOO) - 30 %,

Merrill Lynch UK Gilts (GOLO) - 10 %,

Merrill Lynch Japan Governments (GOYO) - 10 %,

Merrill Lynch Australian Governments (GOTO) - 5 %

on:

Merrill Lynch U.S. Treasuries, 1-5 Yrs (GVQO) - 45 %,

Merrill Lynch EMU Direct Governments, 1-10 Yrs (EGOS) - 30 %,

Merrill Lynch U.K. Gilts, 1-10 Yrs (G5LO) - 10 %,

Merrill Lynch Japan Governments, 1-10 Yrs (G5YO) - 10 %,

Merrill Lynch Australian Governments, 1-10 Yrs (G5TO) - 5 %.

Figure 25. NBK’s refinancing operations (balance)

Note: National Bank of Kazakhstan

According to the Decree of the President from March 27, 2009 of No. 777 for

the purpose of employment, prevention of essential growth of unemployment and

creation of conditions for sustainable post-crisis development in 2009 from

National fund during 2009 it was withdrawn in the form of a target transfer of

261,5 billion tenge .

For the purpose of a diversification of custody storage of assets of National

fund in January, 2009 it was translated assets at a rate of more than 3 bln. dollars

into the account of a stabilization portfolio in Federal Reserve Bank of New York.

In the second quarter 2009 it was translated assets denominated in euro for the

account of a stabilization portfolio in Clearstream.

According to the Rules of a choice of external managing directors assets of

National fund approved by the resolution of Board of National Bank No. 66

annually carry out procedure of an assessment of efficiency of activity of external

managing directors of National fund on the basis of results of the last 2-3 years. By

results of the carried-out analysis, the resolution of Board of National Bank No. 50

interrupted agreements on investment management with the following external

managing directors:

1. Under the mandate «Global bonds» - Blackrock Financial Management, Inc.

2. Under the mandate «Global actions» - Alliance Capital Limited.

The portfolio of the external managing director of National fund under the

mandate «Global bonds» was transferred in independent management of National

Bank, whereas a portfolio of the external managing director of National fund under

the mandate «Global actions» - to the external managing director who has shown

the best results of this mandate, - JPMorgan Asset Management.

With a view of a diversification, and also management efficiency increases by

assets of National fund among managing directors of assets of National fund,

considering that in recent years the program of external management was

considerably reduced by assets of National fund, the decision on its expansion was

made. In this connection, the Resolution Board of National Bank No. 105 on

November 30, 2009 was accepted.

Considering uncertainty in the world financial markets, for the purpose of

minimization of financial risks, at the initiative of National Bank, and also from

approval of Council for management of National fund of the resolution of Board of

National Bank of the Republic of Kazakhstan from November 30, 2009 of No.

107, changes and the additions providing change of tactical distribution of a

savings portfolio of National fund on an index, consisting for 80 % from bonds and

20 % from actions, and also decrease in a share of US dollars in reference currency

distribution of a savings portfolio of National fund from 45 % to 40 % at the

expense of increase in a share of euro from 30 % to 35 % were made. Currency

distribution of gold and exchange assets according to the resolution of Board of

National Bank No. 104 from November 30, 2009 was similarly changed also.

In December, 2009 in response to the decision of Board of National Bank No.

104 from November 30, 2009 operations on change of currency distribution of an

investment portfolio towards reduction of a dollar component from 45 % to 40 %

in favor of increase in a component in euro from 30 % to 35 % were performed.

On July 4, 2009 the Law of the Republic of Kazakhstan «Was passed about

modification and additions in some acts of the Republic of Kazakhstan concerning

currency regulation and currency control», developed with a view of further

improvement of system of currency regulation and currency control. The law

installed on August 11, 2009, provides:

1) further liberalization of currency regulation and simplification of

administrative procedures;

2) simplification of requirements of repatriation of currency revenue and

strengthening of responsibility for non-compliance with the requirement of

repatriation;

3) expansion of a range of measures of currency regulation which can be

applied in case of threats of safety of the country and stability of a financial

system.

With a view of liberalization of currency regulation and simplification of

procedures of currency control by the Law it is provided:

1) an exception of licensing of activity on implementation of retail trade and

rendering of services for cash foreign currency (duty free shops, realization of the

goods and services to passengers at international transport);

2) removal of restrictions on operations with affiliated gold between residents;

3) cancellation of the requirement of the notice of opening of bank accounts in

foreign banks for individuals;

4) possibility of increase in threshold values on registration, the notice and

certification by adoption of subordinate regulatory legal acts;

5) possibility of reduction of the list of the operations which are subject to

registration and the notice, by adoption of subordinate regulatory legal acts;

6) simplification of procedure of the notice of operations of clients for banks

and professional participants of securities market.

With a view of improvement of administrative procedures and strengthening of

responsibility for non-compliance with the requirement of repatriation by the Law:

1) concepts «the repatriation requirement» and «repatriation term» are

specified;

2) the right is provided to the resident as the party of the foreign trade contract,

independently to count repatriation term, proceeding from terms of the contract;

3) the exhaustive list of cases which don't assume revenue transfer into

accounts in the Kazakhstan banks is established, but are equated to execution of

the requirement of repatriation;

4) responsibility for a non-return of currency means under the foreign trade

contracts is specified. In particular, administrative responsibility comes at excess

of the sum of a non-return of an equivalent of 50 thousand dollars (before 10

thousand dollars), and criminal - if the sum of a non-return exceeds 10 thousand

MRP (before 5 thousand MRP).

The law is expanded and anti-recessionary measures regarding introduction of

currency restrictions which can be entered by the Head of state for elimination of

threats of safety of the Republic of Kazakhstan and stability of its financial system

are more specifically defined. The concept of «a special currency mode» is

entered, the concrete list of measures which can be applied within a special

currency mode is given, duration of the period of its action is limited and the

responsibility for violation of requirements of a special currency mode is defined.

Besides, with a view of protection of interests of the population as consumers

of financial services the Law entered the norm granting the right to National Bank

on establishment of a maximum permissible margin on operations, carried out by

exchange offices.

Thus, the passed Law, on the one hand, contains the norms simplifying

business, and, with another, applications of anti-recessionary measures raising

efficiency in case the economic situation demands their introduction.

With a view of implementation of the Law by National Bank the following

resolutions of Board of National Bank are adopted:

1) from July 24, 2009 of No. 68 «About recognition become invalid the

resolution of Board of National Bank of the Republic of Kazakhstan from

September 15, 2005 of No. 115 «About the statement of Rules of licensing of

implementation of retail trade and rendering of services for cash foreign currency

in the Republic of Kazakhstan» [41], in connection with the exception provided in

the Law of a mode of licensing of activity on implementation of retail trade and

rendering of services for cash foreign currency;

2) from August 24, 2009 of No. 78 «About the statement of Rules of

establishment of limits of a deviation of a buying rate from a selling rate of foreign

currency for tenge on the operations which are carried out through exchange

offices» in which the mechanism of realization of function of National Bank is

determined by establishment of limits of a deviation of a buying rate from a selling

rate of foreign currency for tenge on the operations which are carried out through

exchange offices and an order of establishment by National Bank of the most

admissible margin on operations of exchange offices and types of currencies

concerning which such requirements can be established;

3) from August 24, 2009 of No. 77 «About modification and additions in the

resolution of Board of National Bank of the Republic of Kazakhstan from August

17, 2006 of No. 86 «About the statement of Rules of implementation of export-

import currency control in the Republic of Kazakhstan» in which increase of

threshold value on certification of transactions from an equivalent of 10 thousand

dollars to an equivalent of 50 thousand dollars, and also simplification of

requirements of repatriation of currency revenue by specification of the concept

"repatriation", repatriation term, and also specification of application of

administrative and criminal liability for not return from abroad means in national

and foreign currency is provided;

4) from August 24, 2009 of No. 76 «About modification and additions in the

resolution of Board of National Bank of the Republic of Kazakhstan from

December 11, 2006 of No. 129 «About the statement of Rules of implementation

of currency transactions in the Republic of Kazakhstan». The resolution provided

increase in threshold value for currency transactions of movement of the capital at

which excess they are subject to registration or the notice: for operations on capital

outflow threshold value is increased from an equivalent of 50 thousand to an

equivalent of 100 thousand dollars, for operations on capital inflow - from an

equivalent of 300 thousand to an equivalent of 500 thousand dollars.

With a view of optimization of procedures on providing information on

payments and (or) transfers of clients by authorized banks to National Bank the

resolution provided submission of information on payments on the currency

transactions which are subject to the notice (opening of accounts by individuals in

foreign banks; payments between residents and nonresidents at implementation of

calculations for export (import) of works) in the form of a reporting form.

In crisis along with consecutive cancellation of currency restrictions of one of

problems of liberalization there was an improvement of system of statistical

monitoring of currency transactions, and also increase of efficiency of control

procedures with a view of observance by residents of requirements of the currency

legislation, including strengthening of administrative responsibility. Thus the most

part of control functions in the field of implementation of currency control is

delegated now on regional level of territorial branches of National Bank.

The devaluation of the tenge which has been carried out in February, 2009,

demanded acceptance of a number of measures for situation stabilization in the

currency market of the currency exchange, arisen in connection with speculative

operations with cash foreign currency. With a view of improvement of the

competitive environment in the organized market of a currency exchange,

protection of interests of the population and prevention of carrying out foreign

exchange operations out of the organized market of a currency exchange the

National Bank took the following measures:

- increase of requirements to the size of the authorized capital, caused by

growth of volumes of the authorized organizations of operations made in exchange

offices with currency and, respectively, increase in accompanying risks. The

increase in authorized capital reflects need of strengthening of technical equipment

of exchange offices, increases of transparency of activity of the authorized

organizations, and also rendering of services to the population in higher qualitative

level.

- establishment of the right of National Bank on introduction of limits of a

deviation of a buying rate from a selling rate of foreign currency for tenge. It is

supposed that such deviation will be entered for an excessive demand of the

population for foreign currency with a view of protection of interests of the

population, as consumers of the services rendered by authorized banks and the

authorized organizations in the organized market of a currency exchange, and also

prevention of development of the "shadow" market.

- responsibility for violation of requirements of the currency legislation at

carrying out the exchange operations providing application of administrative

sanctions.

For ensuring removal of social tension at the population, arisen in connection

with speculative operations with cash foreign currency, explanatory events through

mass media are held, the corresponding letters are sent to Presidential

Administration, Office of the Prime minister, Independent Association of

businessmen, People's democratic party «Nur Otan», National economic chamber

of Kazakhstan «the Atameken Union and to the authorized organizations.

Besides, on a constant basis monitoring of exchange rates is carried out, the

monthly analysis of activity of exchange offices is made, the statistics of violations

in the field of exchange operations is conducted.

Anti-recessionary measures of National Bank in the field of export-import

currency control in 2009 it was directed on further implementation of the upgraded

version of export-import currency control.

Regarding the measures undertaken by National Bank with a view of decrease

in load of business within export-import currency control, during 2009 the

following work was done:

- since November 1, 2009 threshold value at which excess transaction

certificate registration is necessary, is increased from an equivalent of 10 thousand

dollars to an equivalent of 50 thousand dollars. According to data of 2008 it will

provide reduction more than on a third of number of pass ported trading contracts,

generally the enterprises of small and medium business. Thus for transaction

certificate closing providing any documents from participants of foreign economic

activity isn't required;

- the transaction certificate form is simplified by a way of an exception of

excessive columns and sections;

- in June, 2009 within the working group on development of the new Customs

code of the Republic of Kazakhstan article 295 edition according to which taking

into account the Control system of risks the copy of the transaction certificate is

provided in the list of the additional documents represented at release of the goods

by only certain categories of participants of foreign economic activity (a yellow

and red corridor) is coordinated;

- in September, 2009 with assistance of Association of financiers of

Kazakhstan the meeting with representatives of large banks concerning tariff

policy, including regarding collection of collecting according to the transaction

certificate was conducted.

Moreover, in February 2009 a Law of the Republic of Kazakhstan on issues of

organization and operating of Islamic banks and organization of Islamic financing

was adopted. The Law covers issues of operating of Islamic banks, Islamic

investment funds, and issuance of Islamic securities in Kazakhstan. The Law

specifies following types of Islamic securities: shares and common stock of Islamic

investment funds, Islamic lease certificates, and Islamic participation certificates.

Islamic lease certificates are issued to finance purchase of real estate, ground areas,

etc. The Governments of Kazakhstan and the UAE have signed an agreement to

launch Al Hilal Bank in Kazakhstan. In March, 2010 the first Islamic bank was

opened in Kazakhstan. At present the legislative field for the action in the republic

of Islamic insurance (takaful) companies is developed.

So, briefly we can classify anti-crisis package conducted by the National Bank

of Kazakhstan as follows:

1. A Joint (the Government, the National Bank, the Financial Supervisory Agency)

Two-Year Action Plan for stabilizing of the economy and financial system:

(Funding (USD 10bln.) has come from the National Oil Fund)

provision of public support to the top four banks

steps to aid the completion of unfinished residential construction projects

and spur housing demand

financial assistance to the SME and agricultural sectors

increased public investment in the industrial sector

2. A new Tax Code was adopted (on January 1, 2009):

corporate income tax has been reduced to 20%

mineral Extraction Tax replaces the royalties on oil production

the VAT was reduced from 13% to 12%

3. The Government, in cooperation with the local authorities, provided

employment for workers temporarily unemployed.

4. The sharp deterioration of the balance of payments demanded the devaluation of

national currency – Tenge. Reasons for Tenge devaluation were: further supporting

of Tenge could bring to the full depletion of foreign exchange reserves; main trade

partners of Kazakhstan devalued their currencies; domestic producers and

exporters needed support of their competitiveness.

The main goals of financial sector development in post-crisis period were

defined:

financial sector stability

creating conditions to prevent effect of instability factors and negative events

which were detected during the last financial crisis

stimulation of investment activity

restoration of trust and confidence in the financial sector by both investors and

consumers of financial services

financial resources mobilization in the post-crisis period (attracting of

institutional investors’ funds by elaborating public private partnership as a main

mechanism. It will make possible to implement and develop the potential of

private initiative and preserve the function of the state in socially significant

sectors of the economy; development of the instruments of Islamic financing)

consolidation of the financial sector supervision and regulation system

(implementation of the counter-cyclicity principle in regulation (for financial

leverage, owner's capital, reserves and liquidity, and reserve requirements; the

gradual increase in minimum size of a capital, especially for banks;

strengthening of the risk control of «systemically important» financial

institutions, considering their impact on the other financial organizations,

markets and instruments)

strengthening of the mechanisms of rights protection for investors and

consumers of financial services (tightening of the requirements for board

members of financial institutions; establishment of «black lists» of financial

organizations, their officials, issuers, shareholders whose activity resulted in the

bankruptcy of financial institutions; the quality of corporate governance and

transparency of financial institutions will be improved; the bonus system of the

top managers of financial institutions will be improved; the term «affiliated

persons» will be expanded)

regulation of the systemic risks (implementation of the macro prudential

regulation system:

– early detection of risks

– differentiated approaches in regulation of financial institutions depending

on their significance and their «systemically important» character

strengthening of the role of the National Bank in providing of financial stability

and implementation of macro prudential regulation through:

– determination of the main sectoral principles and approaches of the

prudential regulation;

– development of anti-crisis management and losses minimization measures

in a case of systemic risks realization)

PART III CRISIS MANAGEMENT AS A NEW MANAGEMENT

PARADIGM

3.1 World practice on anti-crisis measures conducted during the global

financial crisis

For the purpose of restriction of crisis distribution the Government and central

banks took various anti-recessionary measures. Thus, if during the first period of

crisis as the most active measures were conducted, generally, by the developed

countries of the world, the events developed in the autumn of 2008, provoked a

collapse of stock markets and even stay of the auction, led to unprecedented

acceptance of the considerable coordinated and emergency anti-recessionary

measures and stabilizing programmers from the majority of the countries of the

world.

Generally the package of anti-recessionary measures was carried out in such

directions as:

1) saturation of the markets by liquidity;

2) direct funding of financial institutions;

3) increase in the capital;

4) the announcement of straight lines and the hidden guarantees according to

all obligations of financial institutions for the purpose of trust preservation to

financial systems. Thus the majority of the accepted measures are temporary; as

many states defined the time horizon (on the average for 2-3 years forward) their

actions till the end of decrease in the general turbulence of consequences of crisis

(Table 2).

Measures Forms and methods

Problem: Lack of liquidity

Increase in volumes of operations

and terms on classic instruments

of refinancing

Short-term operations (repurchase agreements), less than a year

Long-term operations (repurchase agreements), more than a year

Refinancing debts

Auctions on providing/placement of credits/deposits in US dollars

Agreements on currency transactions the SWAP in US dollars and

other currency between the central banks

SWAP Operations with US dollar and other currency

Non-deposit ed credits (including subordinated) through the state

banks, Central Bank and Government deposits

Schemes of an exchange (repayment) of illiquid assets of banks on

liquid assets

Extension of the list of mortgaging provided

Extension of the list of the organizations contractors at the

expense of brokers, dealers, credit organizations, investment

banks, insurance companies and other organizations

Decrease in required reserve rate

Decrease in key interest rates

ncrease of percent on deposits in the central banks, payment of

percent on deposits or depositary certificates

Problem: Lack of trust to the financial system

Continued part of Table 2

Increase in guarantees on deposits

of commercial banks

Increase of the maximum sum of compensation on the guaranteed

deposits

The announcement of guarantees

according to obligations of banks

and other financial institutions

Government or Central Bank guarantee on different types of

financial obligations (interbank, external loans, deposits) both

existing and new attracted

Problem: Capital adequacy to risks

Increase of Capitalization to the

adequate level

Recapitalization (repayment and a subscription under new or

available volumes of actions and a subordinated duty)

Compulsory nationalization of financial institutions

Address support Granting the credits as the creditor of final instance to financial

institutions from the government or the central banks

Improvement of quality of assets Repayment of junk assets

The complex solution of problems

with a funded, guaranteeing

obligations, repayment of assets

and implementation of temporary

management

Creation of specialized institutes/funds on support of financial

institutions

Problem: financial markets volatility

Restriction of speculative

operations in domestic markets

Ban on carrying out short sales on all market or according to the

limited list of securities, requirements to information disclosure

Increase in resource base of

foreign currency IMF donates

Stabilization of price parameters

of the market

Interventions in the domestic currency markets

Interventions on the organized securities markets

Table 2. Measures for providing stability of the financial system

Note: developed by the author based on literature review

Thus at an initial stage in most cases acceptance of a significant amount of

anti-recessionary measures was apprehended by the markets negatively, giving that

a signal that these measures recognize about the possible hidden scales of

distribution of risk of susceptibility to development of a crisis situation (Table 3).

Stage Monetary policy Fiscal policy

1st stage:

the middle 2007 –

2008

Decrease in interest rates for

prevention of transition of financial

crisis in the economic.

From September, 2007 to

December, 2008, Fed rate is

lowered in 10 times (from 5,25 % to

0-0,25 %)

In the USA the first package of fiscal

incentives (tax returns) is accepted

and date of receipt of unemployment

benefits is prolonged. Measures for

maintenance of the market of housing

begin to be developed: tax privileges

and subsidizing at the expense of the

state, restructuring subprime

mortgages

2nd

stage:

March 2008-

September 2008

Emergency measures on granting

liquidity

3rd

stage:

September 2008-

February 2009

Bailouts to «too big to fail banks» The synchronized state support

according to the solution of G 20.

Measures differ from the country to

the country. Main components: tax

privileges, subsidies for purchase of

new cars instead of old, subsidies to

4th

stage:

March-July 2009

The problem of support of economy

leaves into the forefront. Active

decrease in interest rates and

quantity sub federal provinces, an investment

into infrastructure,

telecommunication, "green"

economy, education, health care and

so forth.

5th

stage

August 2009 -

2012

Dying off of emergency measures

of granting liquidity. Receptions of

strategy of an exit from quantitative

easing

Continuation of earlier accepted

measures: tax privileges, investment

programs, demand subsidizing.

Additional measures: attention to

small business and creation of

workplaces.

Table 3. World practice on anti-crisis policy

Note: developed by author based on literature review

Today the deflation became more serious enemy, than inflation. At the rate of

percent close to zero, the central banks are compelled to use other tools and

methods. They extended the activity to new contractors, started to provide the

credits to investment banks and finance companies. There was a practice of

delivery of the credits on more liberal conditions (non-deposited credits), for

longer terms (till 6 months instead of 1 week in Eurozone).

Moreover, currency swaps were widely spread between countries.

Thus, in process of crisis development in developing countries opposition

between the government and bodies of monetary and credit regulation accepts

rather rigid forms up to resignation of the head of the central bank, and

appointment to this post of officials, more loyal to the government. The main

conflict in these countries consists, as a rule, in unwillingness of the Central Bank

to pursue softer monetary policy. While representatives of the Central Bank are

inclined to overestimate risk of inflation (and, respectively, to overestimate interest

rates), representatives of the governments are inclined to overestimate risk of a

deflation and unemployment (and, respectively, support lower interest rates).

In developed countries in which there are stronger traditions of independence

of the central banks, pressure upon the central banks from the government carries

more careful and substantially informal character. However the total result is the

same - increase of level of cooperation between the government and the central

bank. One of explanations of this tendency is that in the conditions of crisis there

was an expansion of duties of the central banks which began to make not only

purely economic decisions (concerning change of level of an interest rate or an

exchange rate), but also and the political decisions connected with assistance to

financial institutions (in a case with the European central bank - to the sovereign

states). Thus, as shows experiment of Federal reserve system of the USA, before

rendering of financial support of the Central Bank it appears under the pressure of

executive power which is interested in the fastest providing the help, and after -

under the pressure of the legislature of the power demanding carrying out check of

expediency and validity of actions of the Central Bank. Emergence of claims to the

Central Banks is connected with non-uniform distribution of benefits and expenses

from the support program, and also that decision-making process on the matters in

modern central banks is, as a rule, opaque (in difference, for example, from

decision-making in the monetary policy sphere).

Crisis found a contradiction between two purposes facing the central banks, -

stability of the prices and stability of a financial system. They depend from each

other. Price stability is reached by change of a rate of percent. But such change is

capable to render a negative impact on stock market. Increase of a rate of percent

brings down courses of securities, decrease - promotes increase of courses, but

threatens with development of inflationary processes. From these positions

quantitative easing has inconsistent impact on economy.

The policy of quantitative easing is closely connected with fiscal. The injection

in economy is carried out by the central banks of liquidity by purchase of the state

bonds, in order words, national debt monetization. There is a threat of a sovereign

default. While business is limited only to revision of sovereign ratings. So, the

Fitch agency lowered a rating of a sovereign duty of Greece with A- to BBB +.

The reason - a budget deficit equal of 12,7 % for gross domestic product, and the

sovereign duty exceeding gross domestic product. S&P changed a rating of Spain

with stable to the negative. Revision of ratings of the USA and Great Britain isn't

excluded.

Rescue of a financial system turns around growth of the state debt. Crisis

imposes heavy burden on public finance. Reduction in production and expenses on

crisis overcoming by 2014 will lead to growth of a public debt with 79 to 120 % of

gross domestic product in 20 developed the countries.

In October, 2010 with a view of stabilization of the financial market the

meeting at the highest levels "twenty" took place. Into «Great powers» enter 19

largest national economies (Australia, Argentina, Brazil, Great Britain, Germany,

India, Indonesia, Italy, Canada, China, South Korea, Mexico, Russia, Saudi Arabia,

the USA, Turkey, France, the Republic of South Africa, Japan) and the European

union. Constant participants of meetings of "twenty" are IMF, the European central

bank and the World Bank.

The meeting in the Canadian city of Toronto came to the end with adoption of

the total declaration which points to disagreements between leading economic

powers of the world concerning ways of an exit from recession and improvement

both world, and national economies.

Reduction of deficiency of budgets and scales of a public debt, by recognition

of many participants of a forum, was one of the most topical issues of discussion.

Thus a number of the countries which carried out the greatest injections in

financial sector for rescue of banks in crisis - such as the USA and EU countries -

very carefully belonged to this idea, though recognized its efficiency As a result

leaders agreed that process of reduction of a budget deficit will begin no later than

2011, and in two years it should be reduced half.

Besides, by 2016 of the country of "twenty" intend to balance a ratio of a

public debt and gross domestic product. On forecasts of the international financial

organizations, without the decision on fight against national debt growth the

relation of debt of leading economy of the world to gross domestic product will be

excessively high:

- in Japan - 300 %;

- in Great Britain - 200 %;

- in Germany, France and Italy - about 150 %.

In this regard leaders of «Group of twenty» decided to cut deficiencies by half

by 2013, to stabilize or deduce on an accurate decreasing trajectory by 2016 the

relation of a public debt to gross domestic product».

G20 coordinated principles of bankruptcy of financial institutions, and also

protection of taxpayers at bankruptcy. Process on carrying out «country reviews in

member countries of "twenty" which provides the analysis and an assessment of

implementation of recommendations of the IMF on financial performance is thus

already started.

Among the reasons of unleashing the global financial crisis the participants of

the World Economic Forum in Davos mentioned the absence of regulation and

transparency on financial markets, irresponsibility, lack of real leadership and

proper governance, inadequate evaluation of assets and risks. These reasons have

resulted in a total lack of confidence and financial collapse. Already in 2010

another Davos forum was held with the leitmotif: “Improve the State of the World:

Rethink, Redesign, Rebuild.” Actively discussed at the forum were the problems of

increased impact of such risks to the financial stability as the following:

budget crisis risks linked to growing public debts, which could evolve into a

risk of sovereign defaults;

problems of emergence of the second crisis wave related to markets of

government securities (bonds) due to higher level of public borrowing,

absorption of unreliable assets, and reduced trust in world currencies;

the risk of China’s economic slowdown, which could become a shock for

world’s capital markets and, as the result, lead to emergence of the risks of

unpractical capital distribution, strengthening of capital’s speculative nature,

occurrence of new bubbles on the asset and property markets.

Subsequently, effective crisis management of the economy is to act as the

guarantor of stability. To restore the health of business, the world economic

community concentrates on the following goals and means of their achievement:

restoring trust in the banking system through its recapitalization, cleaning up

the balance sheets of commercial banks from “toxic” assets, and providing

government guarantees;

use of fiscal policy tools to stimulate the internal demand, create new jobs, and

provide a social safety net;

restructuring of economies through targeted long-term investing;

maintaining the principle of free trade and free movement implementing

reform of the global financial system (in particular, with regard to revising the

role of World Bank and IMF, strengthening the interrelation between the legal

and economic system, and unification of legal standards to increase integration

and transparency of the international economic and financial operations).

The period of a global post-crisis economic and financial stabilization is

accompanied by an active search undertaken by governments of many countries to

find measures which would be adequate to the real condition of their national

economies. As is generally known, particular features inherent in each of the crises

make it impossible to fully project their impact on the operation of market

mechanisms. Attempts of crisis regulation aimed at supporting the financial

institutions and putting a clamp on the recession have continued throughout the

world since early 2009. The priorities include such approaches as government

measures to stimulate demand, pursuing protectionist policies and easing the tax

burden (B. Obama’s plan, G. Brown’s plan), strengthening the role of central

banks and using the mechanisms of nationalization.

The European Commission is in favor of actively granting tax incentives,

expanding government orders and government investment. The effects of the anti-

crisis measures are somehow linked to the degree of development of the

institutions ensuring the inter-action between the state, in the person of government

agencies, and the private sector. Were selective protectionist support extended to

oligarchic entities based on some political arrangements, “market failures” would

turn into “country failures.” It is essential to provide the orientation towards the

implementation of equal property rights, the distribution of risks, the economic

interests of the state and business, as well as the appropriate streamlining, and if

needed, the adjustment of both formal and informal rules, which regulate their

collaboration.

A reliable system of performance management of financial/investment

resources, which would allow using in the optimal manner the mechanism of

increasing the money supply for the purpose of maintaining domestic demand,

stimulating the investment and innovation activity, creating new jobs and

achieving competitive advantages for national producers, will need to be created in

order to overcome the crisis phenomena, and assure sustainable and competitive

growth. This would allow increasing the level of macroeconomic and financial

stability, as well as reducing the dependence of domestic economic process on

variations of the global market conditions.

3.2 Ways of improvement of anti-crisis packages conducted by central

banks

Possibilities of the governments and the central banks of the countries to

realize anti-recessionary policy depended on an economic situation in precritical

years.

For example, the countries with a critical rate of inflation and the budgetary

deficiency didn't presume at once to start to pursue stabilization soft and fiscal

policy because of threat of destabilization of economy.

From this point of view all countries can be divided into two groups

(Table 4).

The countries which do not have problems

with inflation and the budgetary deficiency The countries with critical problems

1.1. The small

countries, quickly

started to leave crisis

and to toughen policy

Israel, Australia,

Norway

1.3 The largest

countries in which

restoration occurred

most quickly and

there is a danger of an

overheat (The

developing South East

Asia).

2.1 The countries

with very big

problems, superheated

before the crisis

(Iceland, Ireland,

Ukraine)

2.2 Faced an

imbalance at the

beginning, but

managed to localize

them and to pass to

soft policy (Russia,

Hungary).

1.2 The largest

countries which are

coming back to

growth thanks to state

support of the USA,

Japan, the most part

of Europe

2.3 The countries

in which the blow of

the first wave of crisis

was not so strong, but

a loan the situation

was aggravated

(Greece)

Table 4. Country classification according to the crisis impact

Note: developed by the author based in literature review

1. The countries, prior to the beginning of crisis not having critical problems.

These countries could use initially stabilizing soft monetary and fiscal policy.

1.1) Rather small countries which have got to crisis under the influence of

global processes, but quickly started to leave crisis. This group of the countries

already started to leave stabilization measures and to lift interest rates. Examples:

Israel, Australia and Norway.

1.2) The largest countries of the world in which in the last time began

economic reconstruction (return to growth), but it is based mainly on measures of

the state support. These countries prolong the majority of measures, except for

extreme channels of granting liquidity.

1.3) The largest developing countries which returned to fast growth rates and in

which now there are fears of an overheat. Example: China.

2) The countries which had critical problems. These countries were compelled

to concentrate on implementation of stabilization programs by analogy to what are

applied usually by IMF and which include reduction of the budgetary expenses,

and also increase of interest rates for stabilization of national currency. Many of

the countries in this group faced serious problems in the banking sector and were

compelled to carry out nationalization and a recapitalization of banks.

2.1) The countries with initially very serious problems, still compelled to

pursue the above-stated policy. These are "superheated" before crisis the Baltic

countries, Iceland and Ireland, Ukraine etc.

2.2) The countries which faced problems at the beginning of crisis, but could

localize them and then pursue already softer policy, first of all the monetary.

Russia, Hungary treats such countries and, probably, some other not so strongly

affected by crisis of the country of Eastern Europe.

2.3) The countries on which the first wave of crisis struck not so strongly, but

recently obviously become candidates for realization of the policy similar to a

stabilization package of IMF. An example - Greece, candidates: Spain, Portugal,

Spain (PIGS country), Mexico.

The countries carried by us to type 1.2, continue to support economy actively.

The group 1.1 countries in sharp stages of crisis took similar measures, but now

gradually refuse policy of support of economy. The countries of the 2nd group not

always could realize stabilization packages and if could, applied approximately the

same measures, as well as the group 1.2 countries

The majority of the countries entering into group 1.2, is compelled to continue

at the moment or even to expand measures of support of economy, except for

measures of granting liquidity through extreme windows and measures of

insurance of the financial assets entered at peak of a crisis of confidence in the

financial market. Need of extension of measures remains, despite the begun

economic growth, after all the last still is based on the state support of economy

(both on own measures, and on the measures accepted in other countries).

Therefore the majority of measures in those sectors where problems remain,

continue to be realized or last, sometimes in an expanded look (for example, tax

privileges on a mortgage in the USA). Among the closed programs it is possible to

note only the cash-for-clunkers program which had essential effect in the

automobile market, but substantially at the expense of transfer of demand for

earlier term; besides, this program was very expensive.

The second direction of anti-recessionary measures is an identification critical

at the moment problems in economy and development of additional measures for

their elimination. Common problems for the countries from group 1.2 are

situations in small business and on a labor market. In the countries from other

groups, besides these problems, are inherent also more specific: problem of public

finances (group 2.3), danger of growth of inflation and overheat (group 1.1 and

1.3), etc.

The third direction - judgment of the reasons and results of crisis and

development of measures and reforms which would allow to prevent similar crises

in the future. Most of all such reforms it is developed in financial sector. Let's note

also that in the academic literature the question of change of monetary policy

(whether it should react to bubbles, and in what cases) is discussed, and also about

need of introduction of mechanisms of insurance on a case of repetition of the

crises similar to a crisis of confidence of 2008 as at modern complexity of the

financial markets completely to prevent crises it will not be possible.

In the majority of the countries anti-recessionary measures not always had until

recently modernization character, is connected with depth of crisis and doesn't

cancel need of transition to modernization measures. This task is especially actual

for Kazakhstan, and high rates of regenerative growth create for this purpose

objective possibility. Therefore in 2012 the reforms, allowing to start to solve the

key problems which have appeared during crisis and reform, promoting

modernizations of economy should become an important element of policy. As the

main directions of similar policy, it is possible to offer the following:

The financial sector appeared a weak link during crisis therefore actions on its

strengthening are necessary. In particular, the following steps are possible:

1. By an example of other countries carrying out the analysis of weaknesses in

system of regulation and introduction of corresponding changes, taking into

account the last recommendations of FSB and BIS;

2. Also by an example of the leading countries development of approaches to

regulation of prudential and system risks, including regulation and mechanisms of

financial improvement or elimination of non-bank backbone finance companies.

For Kazakhstan the problem of system risks isn't less important, than for other

countries: today it is already clear that the excessive credit boom in precritical

years created such risks.

3. Modernization of regulatory base for development of derivatives and urgent

financial instruments that promotes decrease in volatility in the financial and

currency markets. Crisis needs to be perceived, as possibility to create in

Kazakhstan the modern financial market, having learned on another's mistakes.

Therefore it is necessary not to forbid the tools operating in other countries, and in

advance to consider another's mistakes at creation of own regulatory base.

4. Consolidation of the banking sector and market mechanisms of its

stimulation.

6. Cancellation of excessive regulation of the current activity with a view of

increase of global competitiveness of the Russian banking sector. The majority of

the listed norms remained in Russia since the Soviet Monobank and have no

relation to modern methods of regulation of operational risks. Moreover, they force

banks to incur additional expenses, thereby undermining their competitiveness.

Owing to the increased importance of questions of the analysis and an

assessment of financial stability recently new approaches and methodological tools

find the application for the purpose of more profound studying and identification

of risks for banks.

From the learning of financial crisis 2007 the bankers should be change their

policy and mentality. Though the regulatory bodies are now more cautious about

deregulation still the bankers have to change their practices. Otherwise this type of

crisis may come again. Following pints should be noticed carefully:

In short term future global bank has to restore their balance sheet. In order to

do this banks need growth. But in the weak market growth is very hard to achieve.

In earlier time M&A treated as the source of growth. But after the crisis most

financial institutions lost the capacity of M&A finance. Moreover many believe

buying weak organization is not a good decision indeed. It is also tough decision in

a fragile recovery, debt payoff tendency of customer and uncertain regulatory

changes. So global banks should take the market share by focusing on small

business which has more saving tendency and less risky but profitable loan taking

behavior.

Global banks should build strong customer relationship by assessing their need

and providing appropriate product and experience. To doing so they have to invest

in data collection, aggregation and integration and use those to serve customer

more prudently.

The subprime mortgage crisis was arisen due to the regulatory weakness of the

developed countries. The process held some floating agents and unrestricted,

careless bank officers who were not much aware during the loan giving time. So,

this regulation about unit banking system ultimately brought the recent financial

crisis. Banker should be more cautious and skilled prior to handle this type of

complex securities.

The recent crisis has pointed out the failure of International Monetary Fund.

IMF is proven as an inefficient regulatory institution at the time of the crisis.

Global leaders should be work together to form more efficient IMF that can help

the global banking sector.

Some small countries like Bangladesh showed moderate performance at the

time of financial crisis. One of the major reasons is unpopularity of complex

financial instruments. Though it is not the solution still financial institution should

follow some sort of conservative approach as they have to establish the confidence

of the customer.

As the whole industry globally faces a great downturn, obviously some major

crack exists in the system. Regulatory bodies are trying to find out those problems

and brining changes accordingly. Still no one can say playing ground for global

banks become safe again. That’s why bankers should be careful about the future

foot step in this slippery track.

There is no doubt that more coordination in regulatory policies would be

required at the global level. Special care would have to be given to the capital and

liquidity requirements for financial institutions. The global nature of the financial

system makes this coordination imperative.

The enhanced capital and liquidity requirements will be phased in along the

next 5 years. Simply put, this should make the banks safer by providing a greater

cushion to survive the mistakes and accidents from which they suffer. Also the

phase in approach would avoid contractionary pressures on the economies.

The financial institutions have enough time to adopt their balance sheets to

these new requirements. There is no denying the fact that funding costs of banks

would increase under these requirements. Banks with international operations

would have to satisfy the requirements under various jurisdictions they operate in.

One the first look higher capital requirements will have the following effects:

make it harder for businesses and individuals to obtain loans

raise the cost of loans

lower the interest rates offered to depositors and other suppliers of

funds

reduce the market value of the common stock of existing banks.

But knowing that banks are highly levered institutions, higher equity

requirements will reduce the risk of banks and hence lower the returns demanded

by the debt and equity investors. One can anticipate lower ROEs from the banks

due to higher equity requirements.

\It seems quite hypocritical on the part of governments that they make debt

cheaper by preferential tax treatment and then try to regulate the same with higher

capital and funding requirements.

It seems to be a good move by regulatory bodies to require banks to use long

term funding sources and avoid short term wholesale funding (which will be

replaced by equity). This move will bring in stability and avoid short term

speculation.

Short term debt will always remains cheaper than long term debt as it reduces

uncertainty and provides investors a liquidity advantage that they are willing to pay

a premium for.

It was found that banks used off balance sheet structures (SIVs) to evade

regulatory requirements. Enhanced regulatory burden and ever increasing

competition may push the banks to a ‘new shadow banking system’. There is a

possibility that, under the new system, innovation would take ‘credit creation’

away from banking sector. In short, involvement of securitization cannot be fully

eliminated.

For effective oversight, information sharing between the regulatory bodies

would have to be improved to avoid arbitrage. As emerging economies gain

strength in the financial system, their involvement in regulatory coordination

becomes inevitable.

In order to come out of the crisis, there needs to be increase in consumer

demand followed by increase in output. The decoupling of emerging economies

from advanced economies seems improbable. In order to decouple BRIC nations

would have to return to high growth with poor recovery in advanced economies.

Strong export links still exist between emerging and advanced economies which

makes the high growth possible only when demand for their exports grows in

countries like the US and the EU.

Rebalancing of current account balances between the countries is crucial for

global economic recovery. But this seems difficult as various economies operate

on different models. Savings in emerging economies still remain strong. This is

due to the fact that insurance system in these countries is not well developed.

Higher savings reduce the consumption in local economy. In order to grow,

opportunities have to be found abroad by making the exports cheaper and sell them

where demand exists. In advanced economies savings rates are low and hence

these economies thrive on higher consumption.

So,these crises have had severe impacts on labour markets, mainly through the

capital allocation channel but also because financial crises are larger versions of

usual economic downturns. Available empirical evidence suggests that labour

market outcomes during financial crises are worse than in regular downturns, even

after controlling for the size of the recession. In particular, studies of past crises

show that when cost of financing goes up, job creation suffers.

In terms of empirical evidence for misallocation, studies show that there is a

relatively large drop in manufacturing and mining, which have high productivity,

compared to services and agriculture, which tend to have low productivity.

Furthermore, misallocation can persist in the medium term, especially if the

problems in the financial system are not properly addressed.

The recent crisis (2007-12) showed that both during financial crises and in

the recovery phase, unemployment is lower than what would usually be

warranted by the observed drop in output. Furthermore, studies from past crises

show that while in the normal business cycle, old jobs were kept in place, but in

financial crises there was a large degree of job destruction without a commensurate

increase in job creation.

The large impact of financial crises on the labour market can generate

structural adjustments, like increase in long-term unemployment. Since it is

difficult to reintegrate these workers back into the labour force (skills erosion,

labour market detachment, etc.), it could lead to “hysteresis,” that is, the tendency

of large cyclical unemployment outcomes to translate into a permanent increase in

the natural rate of unemployment.

Not surprisingly, there is a vast literature on financial crisis and one story that

emerges clearly is that financial crisis is a reasonably well-defined economic

problem, and it is avoidable with the right set of policies. In order to understand a

financial crisis, it is important to look at the “boom” period that usually precedes a

crisis – two main strands of the literature on crises that attempt to account for this

period. The first view states that the “boom-bust” cycle is evidence of excessive

investment and risk taking (facilitated by easy monetary policy). The second

perspective presupposes that inflated prices in assets increases liquidity – rather

than excessive investment – and facilitates investment. Whichever strand of the

literature one subscribes to, what is clear is that “boom” periods are usually

followed by “bust”. That is, “bubbles” tend to ultimately lead to “bust” when asset

prices drop precipitously and financial markets are no longer functional. Financial

markets become dysfunctional because of liquidity problems (when firms cancel

good projects in the face of liquidity constraints) and the problem of contagion

(financial institutions and markets are interconnected, hence become the carrier of

the crisis). These problems suggest that government has a role to play in mitigating

the fall from a “bust.”

The primary role of financial markets is to direct resources to their most

productive uses, and when this ability is compromised, productivity suffers and

could have long-term impact. The most direct real effects of disruptions in

financial markets are on capital (re)allocation during and aft er the crisis. Th e

potential role of misallocation in delaying the recovery in Japan and Mexico in the

1990s underscores the need for authorities to intervene quickly and thoroughly in

the banking system. Furthermore, Sweden in 1991-93 serves as an example of

swift government intervention that held banks accountable while providing much

needed government support.

In order to prevent the potential problem of moral hazard that comes with bank

bailouts, government should lend freely to only the solvent banks, but only do so

against good collateral and high interest rate. If interest rates are high, banks are

incentivized to repay the government as quickly as they can, withdraw from risky

projects, and attract private capital. Effective government policies will revive the

credit markets, restore confidence in the financial system, and enable the financial

sector to perform its task of allocating scarce resources to their most productive

usage.

In this respect, financial regulation can play an important role. Boom-bust

cycles often follow periods of financial liberalization reforms. This is consistent

with the excessive risk taking view of booms, as financial de-regulation reforms

have typically facilitated risk taking. But returning to the previous regulatory

frameworks is probably not advisable either, as the heavy intervention of the

government in the allocation of credit was also distortionary. Regulatory reforms

were successful in generating higher growth, and now the challenge is to retain

these gains while recovering the stability that existed before the reforms. In light of

the recent crisis, studies suggest that financial regulation should become “macro-

prudential,” that is, capital adequacy ratios should respond not only to the

individual risk of securities held by banks, but by how they correlate with

macroeconomic variables and, in particular, with how they behave during financial

crises. Macro-prudential regulation should also be cyclical, tighter in the boom and

weaker in the downturn.

Even well designed financial regulations are constrained by a boundary. Any

financial regulation has to specify which assets and institutions fall into its rules

and which ones do not. This creates an incentive for funds to flow towards the

unregulated institutions in the boom periods and back to the regulated ones in the

crisis, potentially amplifying the cycle. Finding the balance thus in terms of

excessive or inadequate financial regulation is challenge for policy makers.

CONCLUSION

The research which has been carried out in this work, led to the following

conclusions:

1. The current financial crisis, most likely, will become history not simply as

the first global crisis, but also as the crisis which sharpest phase ended thanks to

the coordinated policy of leading world powers. The state policy allowed many

countries to stabilize quickly economy and even to return to almost critical rates of

development.

2. The financial and economic crisis essentially changed nature of functioning

of a world banking system. Till 2007-2011 one tool - a short-term rate of percent

was used generally; one aim - stability of the prices was pursued. Was considered

that the Central Banks should apply the percentage tools, and all other markets will

automatically adapt to their policy.

3. In the conditions of crisis the concept of independence of the central banks is

substantially revised. Before crisis carrying out an independent monetary policy

(isolated from executive and legislature) was much simpler, as the main attention

was reduced to control of interest rates. Now, when the central banks began to

support problem (state and private) borrowers, the border between monetary and

credit and fiscal policy becomes more and more dim. Certainly, hardly it is

necessary to expect loss of an autonomy of the central banks (especially

considering rather strong possibilities of banks on lobbying of idea of the

independence), however closer cooperation between the national governments and

the central banks is obvious.

4. As a whole the policy till 2011 can be characterized as policy of knocking

over of the problems which have arisen during crisis. As well as in other countries

in a significant amount of cases this policy ran counter to problems of

modernization of economy that especially well it is visible on a policy example

concerning employment and unemployment reduction.

5. The combination which has developed in crisis of various risk factors made

essential destabilizing impact on economy of Kazakhstan and compelled the state

to carry out intervention to economic and financial processes with a view of

maintenance of financial stability. Negative tendencies in economy in crisis were

defined by the whole complex both external, and internal risk factors.

Decrease in the world prices for the main export articles and devaluation in

the countries - the main trading partners of Kazakhstan.

Deficiency of a funding of the banking sector. By the end of 2008 the

international markets of the capital were actually closed for the Kazakhstan banks

that were even more aggravated from the beginning of process of restructuring of

two backbone banks.

External debt. Need of service of an external debt the banking sector of the

country in the absence of possibilities to refinance obligations in foreign markets

led to essential decrease in a duty of the banking sector.

Decrease in credit activity of banks. Deficiency of a funding of banks led to

decrease in volumes of delivery of the new credits to economy that sharply

worsened the provision of such segments of real sector, as small and medium

business, trade and rendering of services, construction branch. Besides, low

volumes of retail crediting were also negatively reflected in internal demand.

Deterioration of a credit portfolio of a banking system.

6. Kazakhstan went on the European way, trying to hold in every way

employment and using for this purpose both administrative levers, and the

organization of public works directly in a place of the main employment of

employees. From the point of view of problems of modernization, it would be

desirable to allow for the companies to get rid of excessive labor, to increase labor

productivity and efficiency of the work.

7. For last period of time anti-recessionary measures could stabilize a world

financial system and create conditions for renewal of economic growth. However,

the short-term prospect of further development still remains uncertain, hiding for

itself possible risks for a world financial system. Anti-recessionary measures of the

states could stimulate a certain revival of economy; stabilize a financial position of

financial institutions. However there is a risk of that without state resources it will

be difficult to financial institutions to obtain in the market funds in case of policy

end on support of the financial markets to a complete recovery of trust on them.

8. The public funds transferred to financial institutions for support of real

sector, are put in the financial markets, creating thereby risk of their overheat and

growth of scale of speculative operations. In view of danger of creation of new

"bubbles" taking measures, directed on restriction of moving of the speculative

capital is necessary.

9. Decrease in solvent demand minimizes threat of growth of inflation in the

short-term period; however large-scale injections of public funds in economy and

preservation of interest rates at a low level create threat of inflationary pressure in

medium-term prospect.

10. The large-scale state help led to growth of deficiency of the state budget

which creates preconditions for increase in sovereign debt burden and the related

risks.

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Appendix 1

World GDP Growth rates and Core Inflation rate, y-o-y,%

Note: The World Bank Outlook

Appendix 2

Anti-crisis package goals and instruments

Note: The World Bank Outlook

Appendix 3

Main social-economic indicators in Kazakhstan

January-May

2012

May 2012 January-

May 2012

to

January-

May

2011, %

May 2012 to

May 2011,

%

May

2012 to

April

2012, %

Socio-demographic indicators

Population (end of year), thsd.

persons 16 776,6 16 776,6 101,5 101,5 100,1

Natural increase (decrease) of

population, thsd. persons 97,0 19,9 108,7 111,8 91,3

Migration growth (loss), thsd.

persons 4,2 -0,3 80,8 -0,3 -42,9

Number of the registered cases

of tuberculosis of breath organs,

persons 5 247 1 052 94,0 89,5 84,2

Number of the detected carriers

of a HIV infection, persons 907 210 111,3 118,0 107,1

Number of crimes registered,

thsd. cases 113 066 24 941 178,0 150,8 107,0

Level of crime (the number of

crimes per 10 000 population) 162 - 174,2 - -

Population living standards

Nominal money income

(estimation), average per capita,

tenge 48 859 115,1 112,0 100,9

Real money income

(estimation), % 106,7 109,6 106,7 100,2

Living wage amount, tenge - 16 119 - 101,1 100,2

Labour market and wages

Number of unemployed, thsd

persons (estimation) - 473,6 - 101,5 99,7

Number of registered

unemployed thsd persons - 70,5 - 106,5 103,5

Unemployment rate, %

(estimation) - 5,3 - - -

Share of the registered

unemployed % - 0,8 - - -

Level of the latent

unemployment, % (estimation) - 0,3 - - -

Average monthly nominal wage

of one worker, tenge 95 712 98 942 117,2 117,6 101,4

Real wage index, % - - 111,7 112,0 100,7

Prices

Consumer price index, % - - 105,0 105,0 100,7

Producer price index, % - - 108,5 101,3 98,4

Price index in agriculture, % - - 90,8 88,6 98,7

Price index in construction, % - - 105,4 105,4 100,4

Price index of wholesales, % - - 101,6 100,1 100,4

Index of tariffs for transport

services, % - - 107,0 113,5 100,0

Indexes of tariffs for services of

postal and courier for legal

entities, % - - 98,2 96,9 100,0

Indexes of tariffs for services of

communication for legal entities,

% - - 95,2 99,1 100,3

Price index of export deliveries,

% - - 126,6 114,8 99,9

Price index of import receipts, % - - 99,7 94,1 98,7

National economy

Short-term economic indicator,

% (calculated on real rate of

growth in six branches -

agriculture, industry,

construction, trade, transport,

communications) 11 833,7 2 469,5 104,2 103,4 102,6

Gross domestic product, billion

tenge

(January-March 2012) 5 976,7 - 105,6 - -

Investments into fixed capital,

billion tenge 1 541,3

431,1 105,9

110,6 119,7

Trade

Retail trade turnover, billion

tenge (excluding services of

public catering) 1 570,7 335,2 111,9 112,3 106,3

Foreign trade turnover, million

USD 54 591,2 12 482,1 120,5 115,3 112,5

Export of goods, million USD 38 346,5 8 861,5 119,5 123,5 116,5

Import of goods, million USD 16 244,7 3 620,6 122,8 99,2 103,9

Real sector of economy

Industrial production volume

(goods and services), billion

tenge 6 775,3

1 324,5 102,3

100,9 98,5

Volume of gross agricultural

products, billion tenge 345,8 84,8 93,7 92,4 120,8

Volume of construction works,

billion tenge 543,7

177,8 100,2

101,5 130,9

Cargo transportation by all types

of transport, million tons 1 138,2 240,8 119,2 116,7 106,0

Cargo turnover by all types of

transport, billion tkm 183,2 37,4 115,2 109,7 102,9

The volume of services postal

and courier activities, billion

tenge 7,0 1,5 115,0 123,0 104,4

The volume of communication

services, billion tenge 236,1 49,6 113,2 109,9 104,6

Entrepreneur confidence index

for industry - +12 - - -

Entrepreneur confidence index

for trade - +5 - - -

Consumer perception index - +19 - - -

Purchase intention index - +18 - - -

Financial system

Monetary mass М3, billion

tenge - 10 334,9 - 115,2 99,4

Cash in circulation, billion tenge - 1 350,1 - 118,2 100,6

Deposits in bank system, billion - 8 984,8 - 114,8 99,3

Deposits of the population,

billion - 2 955,7 - 126,7 100,4

BSL credits of economy and

population, billion tenge

- 9 167,4 - 117,4 101,1

Long-term credit investments of

BSL, billion tenge - 7 401,4 - 113,5 102,3

Profitability of enterprises and

organizations

(I quarter 2012), % 35,9 - - - -

Debts of enterprises and

organizations, billion tenge (on

April 1, 2012) 8 784,7 - 116,4 - -

Debts under obligations of

enterprises and organizations,

billion tenge (on April 1, 2012), 25 218,8 - 113,6 - -

Note: The Agency of Statistics of the Republic of Kazakhstan