KAZAKH MARKET DEVELOPMENTS - 4/29/99

At first sight an idea proposed by a banker [to allow non-government Pension Funds (NGPFs) to participate in privatization] looks alluring. NGPFs complain that they are forced to "have one dish offered" and urge the government to expand a scope of their investment opportunities, in particular remove restriction of "A" listing for shares permitted for the PFs. 

However, one has to look at this from the government's point of view. Having strictly limited the activities of Pension Funds, the government has secured a market for its domestic borrowing. The current structure of pension assets does not favor such loosening for the PFs yet. Thus, 76% of all pension assets and 80% of all pension investors (people making obligatory pension installments) are concentrated in State Pension Funds. The investment portfolio too is uneven, with the NGPFs having invested 70-80% of their assets in Kazakh Eurobonds (thereby facilitating a narrowing of spread). Government papers, both Tenge- and Dollar-denominated, form a major portion of the State Pension Fund (SPF) portfolio. This means that the authorities actually have indirect control over the major part (95%) of pension assets, which can be easily used for financing budget needs. In fact, the market has seen cases of this "control" quite recently. Thus, on the last day of December there was an undeclared auction on T-bills with huge placement of about KZT 8 bln maturing on April 2. In the official data this amount was part of an outstanding domestic debt. Just after the recent announcement of the Tenge devaluation, this figure disappeared with a formal explanation that it had matured in January '99.

KZT 8 bln. is essential for the local market to maintain equilibrium, even if it is temporary. This example obviously shows that the government can scarcely give up with ease such a "source" for borrowing, particularly when tax collection is poor.

Another argument used by the NGPFs is a doubt in the ability of authorities to collect increased amounts under the "ambitious" privatization target. The budget figure of about KZT50 bln. of privatization revenues now is essentially less in terms of US Dollars, by about $250 mln at current exchange rates. The outcome of the first quarter was relatively good - 94% of planned privatization revenue was collected (KZT17 bln.). This does not necessarily mean that the budget target will be achieved for certain, but does provide the authorities additional time and room for the maneuvering necessary to find strategic investors or develop other facilities for privatization.

Besides, the lack of an appropriate legal base necessary to open access to PFs in the sub-A category enterprises substantially increases risks of PFs investment, and in turn, the pension savings of the people. This is probably the strongest argument against NGPFs, in terms of the credibility of the pension reform as a whole, and retaining the people's trust in the government guarantees. Social stability is one of the distinguishing features of Kazakhstan that the authorities need to fall back on now, particularly as they cut the social allocations in the budget. For its part, the PFs can only offer to rely on the integrity of their management's, an offer that does not sound convincing.

Unwillingness of enterprises to open up and disclose information, thereby inhibiting transparency to the stock market, is one of the major factors currently preventing development of the equity market. Imperfect tax legislation puts government paper and corporate stocks in an unequal position (the former is tax-exempt). The lack of risk management systems, shortage of qualified financial intermediaries, and the inadequate interactions between operators are other obstacles to the growth of the equity market. The authorities are not unaware of these shortcomings.

Nevertheless there are serious grounds for the government to turn to the domestic market. Tenge devaluation has made foreign borrowing very expensive. Inflow of foreign direct investment cannot fully cover shortfalls in the balance of payments, which needs to be improved as soon as possible. If one tracks budget revenues from exports since 1996 no essential change (in relative terms) can be observed, even though the years were quite different: 1996 was average, 1997 -quite favorable, 1998 -crisis year. Hence growth of exports due to a devalued Tenge, while possible, is seen only as a one-time improvement rather than a sustainable working factor.

Thus, in view of the above we see that access of PFs to the second-rung enterprises (beyond "A' listing), if any, is a matter of later future. The outcome of the second quarter will become crucial in respect of this issue. Post- Tenge devaluation, if the government succeeds in meeting the budget via existing facilities (major reliance on government T-Bills) involvement of PFs in the privatization process will most probably be postponed indefinitely. But the officials have already announced that the state budget adopted by Parliament on March 31 is to be revised.