Bracewell & Giuliani: Borrowing Restrictions Signal Boost to Kazakh Banks.

ALMATY, Kazakhstan -- Regulators for Kazakhstan banks have tightened the limits on foreign borrowing, a situation which could be good news for Kazakh bank bonds, and outside investment for Kazakhstan's broad emerging marketplace.

"Kazakhstan banks will now be in a better position to manage the risks it faces from the current rapid increase in external debt it has acquired," said Gregory Vojack of Bracewell & Giuliani, LLP Kazakhstan. "Additionally, a decrease in the supply of bonds will naturally increase their worth."

The new regulations from the Agency of the Republic of Kazakhstan for Regulation and Supervision of the Financial Market and Financial Organizations (FMSA), includes a staggered foreign borrowing limit, which maxes out at five times the capital of the biggest banks, and limits smaller banks to only lending three times their capital.

"There have been some negative outcomes of the increasing external borrowing, in particular, higher FX exposure of the banking sector," said Elena Bakhmutova, Deputy Chairman for the FMSA. "Such exposure may have an adverse impact in case of revaluation of FX liabilities of the banks. The other risks include refinancing, interest rate and liquidity risks."

The new measures will slow loan growth, in addition to controlling borrowing -- good news for the sustainability of bank bonds and a secure future for Kazakhstan's banking climate, both large and small.

While the largest banks in Kazakhstan -- such as KKB, Halyk, and BTAS -- will still have tremendous borrowing leeway, second-tier banks may find themselves straining, as smaller banks will be hampered by the proposed restrictions.

However, a surge of new bond issues before the limits take effect may help mitigate this check on growth.

"The fact that banks with bigger share of own capital are in a better position to borrow funds on the domestic market and to restructure their current debt in addition to their adequate risk management system, explains why such differentiated approach to setting up the ratios in relation to banks' own capital has been used," said Ms. Bakhmutova.

Kazakhstan's financial sector is dominated by private commercial banks, and has become one of Kazakhstan's fastest growing features, as a result of deep financial sector reforms and unobtrusive, yet necessary, oversight.

While Kazakhstan's three largest banks hold roughly 65% of deposits by individuals according to the IMF, about half of Kazakhstan's banks have some foreign participation.

"While some politicians and mid-range banks may not be happy about the changes, controlling too-rapid growth of these banks will be a good thing for Kazakhstan's economy overall," said Mr. Vojack. "The appearance of security will increase foreign investment, while still providing room for moderate growth at every level."

About Bracewell & Giuliani

Bracewell & Giuliani LLP is among the nation's most prominent law firms. With 400 lawyers New York, Connecticut, Texas, Washington DC, Dubai, Kazakhstan, London we are distinctively positioned to serve clients concentrated in the energy and financial services sectors worldwide. In 2005, former New York City mayor Rudolph W. Giuliani joined the firm as a senior partner. His international reputation for leadership and problem solving is a unique asset for our clients, which include Fortune 500 companies, major financial institutions, leading private investment funds, governmental entities and individuals. For more information about Bracewell & Giuliani, visit www.bgllp.com.