Thursday, April 30, 2009

Economic Learnings of Kazakhstan for Make Benefit Glorious Investors

My relentless quest for Junk takes me to the far corners of the earth. Figuratively, that is. Today’s subject of interest is Kazakhstan. A country I’ve had to learn about from wikipedia, since it didn’t exist when I was a lad. (and Borat).

Born (or reborn) in the breakup of the Soviet Union, It’s not hard to find on a map, since it is HUGE. It’s the eight or ninth largest country in the world, depending on your calculation method and sparsely populated with only 17 million inhabitants (about half Mulsim, half Russian Orthodox Catholics).

The place is a mineral treasure trove with practically every element in periodic table, including that ever-important U. Oil (about 3% of the worlds reserves) and gas, to boot.
(They need the gas…it gets REALLY cold in Kazakhstan in winter).

Sounds like a great place to invest, right? Well, that depends. Politically, it is led by a “demtator” Mr. Nursultan Nazarbayev since its breakaway in 1991. The constitution allows him to run for president as long as he lives, although future presidents will be limited to two five year terms (we know that can always change). Dissidence is not well tolerated. So keep that in mind

Unlike some of his South American demtator counterparts, however, Mr. NN has embraced market economics and the country has moved in that direction. The Heritage Foundation ranks it 83rd among nations in terms of economic freedom with a “moderately free” classification. (Venezuela is currently 174th, only surpassed by Eritrea, Burma, Cuba, Zimbabwe and North Korea). The economy has enjoyed stellar growth since 2000 until, well, recently (like everyone). Transparency International has Kazakhstan at 2.2 in the corruption scale. (0-10, 0 being the worst).

To his credit, Mr. N has done a pretty incredible foreign policy balancing act. He gets along well with the neighboring Chinese and Russians. He has visited Iran, which lies across the Caspian Sea from Kazakhstan, and still also enjoys relatively good relations with the US and Israel.

The country is facing an economic crisis, the onslaught of which was about a year ahead of the rest of the world (except perhaps Iceland). Banks are the center of the crisis, as local institutions, which financed domestic consumption and construction excesses with foreign capital (sound familiar?) find themselves in trouble.

A few weeks ago, fourth largest bank Alliance, found a $1.1 billion “surprise” liability and has defaulted. This week, the largest bank BTA, already taken over by the government in February, is facing the prospect of default and failure if it is unable to restructure its over $13 billion in foreign borrowings, despite receiving a $2 billion capital infusion from the government. LINK LINK2

In summary, it’s a mess, like everything else, except this mess is an 8-hour plane trip from civilization in every direction.

Invest? Sure. You could make your way down to the Kazakhstan Stock Exchange in Almaty or buy some bonds.

For the adventurous but risk-adverse, we offer Kazmunaigaz, the state-owned gas concern. Its 2013 bonds with a 8 3/8% coupon are trading at around 92%, yielding around 11%, while the 9.125% 2018s are around 87%, yielding close to 12%. Kazakhstan has $18 billion in reserves and I don’t think their gas company is going to default.

On the other hand, for those wishing to roll the dice a bit, we’ll make a suggestion in the banking sector. Not BTA and Alliance, although their bonds trading at 10-20% of par are enticing, restructuring and all. The one we like is Bank Centercredit, a smaller bank, whose largest stockholder (with 30%) is Kookmin Bank, the largest bank in South Korea.

BCCD’s 2011 bonds are trading at 61% to yield a whopping 41% to maturity, while its 2014 offering goes for about 50% to yield 28%. It may be a “coin flip”, but considering the backing, the chances for recovering the full amount at maturity look good enough.

There is a catch, however. If you are a US Person these bonds are off-limits. You can not buy them, you can not read about them. Please stop now before your eyes explode!

Why, you may ask? Well the US may enjoy economic freedom as far as the Heritage Foundation is concerned, but in terms of “investor” choice and freedom, its down by the bottom. Kazakhis can buy US bonds, but US investors cannot return the favor.

But that’s another story.

*demtator = democratically elected dictator. Dictocracy already has an entry in the Urban Dictionary and it means something else.

No comments:

Post a Comment