Why do not Kazakhstani banks want to finance domestic production? Expert opinion

Today, increasing the level of local content in the procurement of goods, works and services by oil and gas operators is one of the important directions of development of the country’s economy. Meanwhile, domestic enterprises face difficulties in financing their projects and lack of mutual understanding on the part of financial institutions. What measures of state regulation should be taken to accelerate the development of domestic business? Senior partner of CSI (Center for Strategic Initiatives), economist OlzhasKhudaibergenovanswered these questions in an interview to petrocouncil.kz.

– Representatives of Kazakhstan’s small and medium-sized businesses, who are trying to act as suppliers on such large oil and gas projects as Tengiz, Kashagan and Karachaganak, complain that the second-tier banks do not want to issue bid bonds. Local branches of banks cannot resolve this issue without the consent of head offices, and they do not show interest in such transactions.

– This problem is present because of the incorrect regulation of this sphere by the National Bank of Kazakhstan. Because the financial regulator does not recognize contracts as a sufficient form of guarantee, and charges additional provisions, or even considers it a violation of the rules.

According to the Ministry of Energy of the Republic of Kazakhstan, over the past five years (2014-2018), the volume of local content in the oil and gas industry increased. In particular, the share of local content in goods increased by 60%, or from KZT 74 billion to KZT 120 billion. That is how much money subsoil users spent on the procurement of goods produced in Kazakhstan. The amount of procurement of Kazakhstani services by operators increased from KZT 771 billion to KZT 835 billion, or 10%, and works – from KZT 834 billion to KZT 1.5 trillion, or 80%.

– One of the reasons for the reluctance of foreign and domestic companies to localize production in Kazakhstan is the lack of long-term money. Why do you think Kazakhstani banks do not want to finance Kazakhstan’s production?

– There is a big tangle of problems, on both sides. The main problem of lending is the excessive regulation of this process. To get a loan for production, you need to present at least 30% of the necessary funds in the form of own capital, not less. The remaining 70% will be loaned, especially, in the presence of a collateral. The collateral that has a market value of USD 10 million will be valued by the bank at USD 5 million, if not USD 3 million. And then the size of the loan can hardly reach half of the collateral value. In fact, to get a loan now, it is necessary to provide a collateral 3-6 times more than the requested amount. As a result, this drastically reduces the initial number of possible borrowers and projects, respectively.

But let’s say that there is such a borrower. The bank will take 6-12 months to decide whether to issue a loan or not, which means additional costs for the borrower – because it is necessary to pay the staff, to bear other costs. Bank employees can work faster and easier, but often it is necessary to give a bribe for this, which, in fact, increases the interest burden on the loan, making it non‑refundable in advance. Moreover, we already have high interest rates – in the range of 15-25%.

In practice, banks have become a brake on the development of the economy of Kazakhstan, and instead of the rapid delivery of money to the desired point of the economy, they have become a big clot delaying the flow of money wherever it comes to investment projects.

On the other hand, unfortunately, most of the presented projects are poorly prepared: either they are affiliated, or poorly developed, or managed by poorly competent people.

– In your opinion, what regulatory measures should be taken by the state in Kazakhstan to attract foreign companies to localizegoods?

– It is sufficient to take several important measures. In particular, the National Bank should recognize the contracts with the largest subsoil users as sufficient collateral for bid bonds, for advanced payment guarantees and in general – execution of the contract. At the same time, the financial regulator can easily monitor the use of the transferred funds.

Also, in general, the government needs to stimulate the creation of joint ventures, where the transfer of foreign technologies is expected, if the products are produced in Kazakhstan for the first time.

– How much is the economy of Kazakhstan dependent on the oil and gas industry in general? Do we have opportunities to increase the development of other industries? Agro-industrial complex, for example? Livestock. Norway, which has a large income from the oil industry, for instance, invests in the development of rural areas. And in our country, for some reason, the entire economy is concentrated in cities. Or is this not our way?

– The oil and gas industry provides directly 18% of GDP and another 15-20% indirectly through related industries. Thus, we are very dependent on this industry.

However, to develop other industries at the expense of oil money is not only possible, but also vital. At least in order not to be dependent on the ever‑changing prices for hydrocarbons. And developed agriculture is a guarantee of food security.

Let me remind you that, in 1990, the share of agriculture in GDP was 35%, and the share of manufacturing industry was about 28%. Now the indicators fell to 5% and 10%, respectively, while the share of the extractive industry increased from 2% to 18%, and the rest was replaced by the branches of public administration. Both agriculture and industry can be raised, but this requires, first, easy, not excessive regulation, for example, it is necessary to expand the types of collateral. That is, it is necessary to recognize contracts with subsoil users as a form of security for the issuance of an advanced payment guarantee.

In addition, it is necessary to reduce the prudential requirements for loans to the manufacturing industry.

We need access to long-term money, which may appear in the case of guaranteeing a large amount of long-term deposits or the active purchase of long-term bonds by the National Bank of the country. This would be one option for quantitative easing.

It is equally important to have a stable exchange rate of the national currency at short distances, predictable – at longer distances. So that investors can plan their projects.

Well, in general, if we talk about the development of local production, it is necessary to introduce requirements for compliance with the requirements for the Kazakhstani content in the entire public sector. It is also necessary to completely change local content calculation and monitoring mechanisms. The current version does not give any control at all.

– Thank you!

Photo: Мария Матвиенко, inbusiness.kz