The 2015 Credit Squeeze: What Lies Ahead for the Economy and Mortgages

Note: This reflects the author's position in 2015. He later came out against concessional state programs and in favor of market-based lending mechanisms.

What will happen to lending, and to us?

I recently visited the websites of several banks to check lending terms for individuals and businesses. Mortgage rates at some banks reach 20%, and some banks are not lending at all. Rates for businesses are also high, and loans are offered only for short terms. The main reasons are the expectation of a devaluation and a lack of tenge liquidity. I wrote earlier about devaluation and set out the arguments for and against it, so I will not return to it here.

My question now is different: what will the absence of credit do to the economy?

Second-tier banks will now lend only to existing clients, to finish projects already under way, or to refinance problem loans. New projects will struggle. The only source of funding is the state programs run by the Baiterek holding. But not everyone will qualify: only priority sectors and a small number of SMEs. This money clearly will not be enough for everyone. Another issue is how the funds are disbursed. The money must first reach the second-tier banks, which, even at the fastest pace, I think will take a couple of months. Then the banks will begin collecting applications, which will take another month or two. As a result, state money will realistically reach borrowers around May–June 2015. Projects will therefore come on stream in the fourth quarter at best, and in 2016 at worst. This will affect industrial growth rates.

So we have two problems. The first is the limited amount of state money. The second is the timing of actual lending to business. A contraction in real lending to the economy will hurt badly, and we need to start forecasting its effects now.

To address these problems, we need money not only for targeted programs but also to increase the liquidity of the second-tier banks. The situation is paradoxical, the kind that arises only in crisis years: the tenge is strong, yet loan rates are 15–18%, or even higher. In this respect, the program proposed by Anuar D. Ushbayev and Olzhas Khudaibergenov could increase tenge liquidity. But it is unclear how quickly and how fully their program will be adopted, all the more so because some of the proposed measures require changes to legislation, which takes a great deal of time. Some measures also require a political decision. And for the proposed program to have a long-term effect, other measures are needed too, above all the liberalization of the economy and a better investment climate. We need to change migration policy and pay attention to education in the country.

The second problem is mortgage lending. Many banks have either suspended mortgage and consumer lending or raised their rates.

Restricting mortgage lending will hit the construction sector hard. Last year construction reached large volumes in both Astana and Almaty. The housing that has been completed has to be sold, but people know how to count their money.

Take a simple example. A person buys an apartment for $100,000 with a mortgage at 20% a year. He will pay $20,000 a year in interest, plus repayment of principal. That $20,000 a year comes to $1,666 a month. For reference, $100,000 in Almaty buys a two-room apartment in one of the residential outskirts, where renting such an apartment costs $500 a month.

As a result, we will see apartment prices fall across the country and a slowdown in construction, especially of housing aimed at the middle class.

At present, the only lending program is at Zhilstroisberbank, and a rental housing program is only now being launched. Again, these programs target people below the middle class. And Zhilstroisberbank's policy of tenge deposits does not appeal to everyone.

A cutback in consumer lending will reduce the purchasing power of the population, especially for big-ticket items such as appliances and cars. Trade, which also accounts for a significant share of GDP, will suffer.

We therefore need a state mortgage lending program that gives the second-tier banks long-term money to provide mortgages to the public. This would stimulate the construction industry and help resolve the repayment of loans previously extended for construction projects. The banks would get back part of the money they lent to builders in the form of mortgage financing, and would be able to lend again to other sectors.

If we had a developed financial market, mortgage lending could be treated not as a long-term investment but as a short-term one: loans to good mortgage borrowers could be sold on the market as financial instruments. That could, for example, help solve the problem of returns at the UAPF (Unified Accumulative Pension Fund). But this requires not only a developed financial market but also an insurance market to minimize risks.

It is hard to predict the impact of restricted lending on the country's economy, but it is a fact that the current situation will weigh on it.

First of all, we need to resolve the question of exchange rate policy for the tenge against the U.S. dollar. The longer we live in uncertainty, the more the economy will suffer.