Opening remarks By A. Saidenov, Chairman of the National Bank of the Republic of Kazakhstan

Ladies and Gentlemen, I am glad to welcome all the participants of today’s brainstorming.
As you know, economy overheating is a quite realistic threat for countries with developing economy, especially when annual GDP growth stayed within 8-12% during several years in a row. However, China’s example can prove that economy’s growth can be two-digits during decades avoiding overheating threat. High quality governance, adequate and timely economic policy measures promote maintaining of sustainable growth and avoiding overheating threat.
For rapidly growing economy of Kazakhstan special attention should be paid to the factors that characterize possibility of overheating for Kazakhstan’s economy. National Bank of RK sees among such factors rapid economic growth, significant growth of asset prices, private debt increase, and inflation.
Total Kazakhstan GDP doubled in real terms in the last 7 years (2000-2006) (98.3%). In 2006 GDP growth was 10.6%. Whereas the most significant contribution to GDP growth for the last two years was made by construction and financial service sectors, i.e. approximately 50%. 
In the situation when the capital market conditions are not sufficiently developed real estate market becomes in fact the main instrument for investments. As a result, real estate prices in the biggest cities of Kazakhstan correspond with the level of prices in European countries, while the level of population income is significantly lower.
Stable high paces of economic growth in Kazakhstan facilitate increasing demand for additional funds by economic entities. In particular improved financial situation and Kazakhstani independent rating promote increase of borrowing capital inflows to the country. Thus the ratio of nongovernmental sector in the structure of gross external debt increased from 62.8% to 87.3% to GDP in 2003-2006. In particular, banks’ external debt as of the end of 2006 was $32 billion USD (41% to GDP). So, currently external borrowing is an important source for the replenishment of banks’ resources.
Banks’ ability to effectively allocate funds mobilized from external capital markets and adequately assess risks has more and more influence on potential country ability to timely meet the obligations to foreign investors.
As you know, rapid growth of financial sources allows banks actively crediting the economy. Total amount of banks’ credits as of July 1, 2007 was 6.6 trillion KZT, i.e. 61.8% to GDP.
Recently a significant increase in banks’ credits to trade and construction sectors is observed. The credits to trade increased by 37.4 % (for the same period of last year the increase was 15.9%) in June 2007 compared to December 2006; the volume of credits to construction sector amounted for 57.3%, while for the same period of last year it was 33.4 %.
    In general a significant increase in credits to trade and construction sectors, exceeding the amount of credits to industry, can create a risk of economy overheating.
Another source of capital inflow to the countries is export earnings in foreign currency. During the last six months the trade balance sheets were characterized by net profit. In 2006 the net profit of trade sector was 14.6 billion USD (18. 7 % to GDP). While more than 90 % of the country export comprises of raw materials and initially processed materials. The share of mineral resources in the total export volume, including oil and gas, was 74.2 %, non-ferrous metals – 10.7%.
External resources inflow provided foreign assets growth of Kazakhstan residents. National Bank international reserves increased during the last six years in 7.6 times as of the 1st quarter of 2006 and equaled to 22.4 billion USD.
International capital inflow also caused trends of nominal KZT appreciation to USD; for the first time such trends were observed in 2003. In 2006 nominal KZT appreciation to USD was 5.1%. From the beginning of this year KZT appreciated by 3.7%.
Capital inflow was exactly the reason for increased inflation pressure in economy. If in 2004 annual average inflation rate was 6.9%, then the results of 2006 showed 8.6% inflation rate.
In the first quarter of the current year the inflation rate was 4.6% (in the first quarter of 2006 it was 4.8%). Annual inflation rate dropped to 8.1% in June 2007 compared to 8.4% in December 2006.
National Bank and Government pay special attention to the problem of overcoming inflation growth as the main factor of economy overheating.
In 2007 National Bank in order to keep the inflation rate continued tightening monetary policy. Such measures were taken to mop up excessive liquidity of Tier-2 banks and increase interest rates for their operations.
Starting March 1, 2007 National Bank began issuing notes with circulation period of one year (till the March 1 notes were issued with circulation period of 28 days only). Notes will be issued with circulation period of 1, 3, 6 months and 1 year.
By issuing notes and accumulating deposits National Bank managed to sterilize 257.7 billion KZT during 6 months of the current year.
Limitation of banks’ liquidity calls for new rules on minimum reserve requirements (MRR), which were introduced in July 2006.  As a result, in order to meet new MMR second tier banks’ reserve assets 1.1 exceeded the level required as of  July 2007, whereas in July 2006 the excess was in 2.4 times.
In the meanwhile shall the problem of excessive bank’s liquidity remains as pressing as it is now National Bank will continue to stricken monetary policy. To ensure sustainability of banking system the credit mechanism, repo operations and rediscount operations will be improved, particularly the list of loan instruments will be expanded.
In July 20 of the current year MMR norms were modified at the meeting of the Board of Directors of the National Bank. Thus, 6% norm for internal obligation and 8 % norm for other obligation were replaced by 6.5 and 10% respectively. Such measure will lead to additional binding of banking system’s liquidity.
Dear Ladies and Gentlemen!
Preventing economy overheating is currently one of the most pressing objectives of the country. It is evidenced by high level of representation at today’s brainstorming
Adoption of optimal strategic development programs, improvement of country macroeconomic stability and further diversification of economy are important areas of activity to address the above issue.
I hope that today’s meeting will give answers to many questions of our interest.
I wish fruitful work to everybody.