EMPIRICAL ANALYSIS - Financial system, and sme financing in Kazakhstan

ADBI Working Paper 904
Y. Dosmagambet et al.
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companies. The list solely includes service industries that are vulnerable to the
conditions in the oil market.
The opportunity to obtain financing from the DAMU is significantly limited to companies
from a narrow list of respective
industries or sectors, such as trade and services.
However, the list does not include such important sectors of the economy as
manufacturing and agricultural production, which exert a positive spillover effect on the
overall economy. The latter can contribute to significant diversification of the economy,
thereby boosting the quality of borrowing by providing loans to companies in the real
economy as opposed to services.
We test for the presence of correlations between creditworthiness and the stock index,
using credit default swap (CDS) spreads as a proxy for the creditworthiness of
the economy. A CDS is a derivative acting as a hedge or insurance policy against
the credit default risk of the borrower. The CDS spread increases when the
creditworthiness of the borrower declines and shrinks in the case that the
creditworthiness improves. Reyngold et al. (2007) were among the first to employ CDS
spreads as an indicator of a company’s creditworthiness and to apply a methodology
with a wider range of reference entities. Castellano and Giacometti (2012) introduced
further modifications and compared their so-called implied ratings with agency ratings
from all three major credit rating agencies, Standard & Poor’s (S&P), Moody’s, and the
Fitch Group. The study documented that the developed
method of implied ratings
generates results with high accuracy.
We find an inverse relationship between the credit default swap spread and the stock
index change. Indeed, a stock index increase (decrease) is associated with a decrease
(increase) in credit risk. The correlation between the credit risk and the stock index
was –0.3 on average from 2005 to 2008. Interestingly, a high negative correlation was
apparent from late 2008 to the end of 2012. The correlation reached the highest swing
around -0.5 and –0.7 for the period. This coincides with the period of financial turmoil
that erupted in 2007. The plausible explanation that Bernanke (2016) provided is that the
global aggregate demand influences both the creditworthiness and the stock index.
Since Kazakhstan is an active borrower on international capital markets, the
economic
performance and its perspectives depend on the creditworthiness of the country. The
economy grew twofold in size to $110 billion from 2001 to 2007, while commercial banks
in Kazakhstan managed to capitalize with triple-digit growth by massively borrowing on
international capital markets (Nuttal and Aris, 2008).
It is possible to consider the KASE
index as a barometer of financial depth. KASE reached its historical maximum in July
2007 and exhibited a horizontal trend during the year. The period from 2001 to the end
of 2008 was a period of economic growth and prosperity. The increase in the CDS spread
in the preceding year (mid-2007) indicates that the credit rating was diminishing and the
probability of default was increasing. As a result, the stock index collapse at the end of
2008 is evident from the approximately 77% drop.
Moreover, we find a clear negative correlation of the sovereign credit risk and the oil
price. One plausible explanation is that a decline in oil prices in most cases has a
significant impact on the credit rating of oil-producing firms or countries, as their revenue
from oil exports will shrink and this will have a negative impact on the government budget
size. We find a significant negative correlation between the credit risk (the CDS spread)
and the oil price, especially since 2008. The average correlation was –0.5 from 2008 to
2017. Thus, creditworthiness is of great importance in relating oil prices to financial
development and the whole economic performance. In line
with this fact, Balcilar, Hammoudeh, and Toparli (2018) focused on the magnitude of
volatility transmission and the risk spillover mechanism across the oil market, the
ADBI Working Paper 904
Y. Dosmagambet et al.
12
financial market risks, and the oil-related CDS sectors. In their study, they examined the
volatility transmission mechanism across the oil and financial markets and the CDS
sectors using the volatility impulse response model. They found that the Lehman
Brothers’ bankruptcy had destabilizing effects on all oil-related sectors. Their findings
also showed that all oil market-related shocks have significant risk transmission
effects on the financial market. Pavlova, de Boyrie, and Parhizgari (2018) studied the
dynamic spillover of crude oil prices and volatilities on the sovereign risk premia of
ten oil-exporting countries. Their results indicated a 4%–31% directional spillover from
crude oil prices to sovereign credit default swap (CDS) spreads. Venezuela, Colombia,
the Russian Federation, and Mexico are the top recipients of crude oil shocks. The effect
of political variables and aggregate demand and supply shocks are relatively smaller
than the oil-specific shocks.
In 2008, the abrupt decline in the oil price damaged the creditworthiness. The global
economic condition affected the risk level and credit rating
as the increased CDS spread
during the period shows. Most of the negative correlation could be explained by the
tendency of the CDS spread and the oil price to react in the opposite direction to common
factors, including changes in the global demand, risk aversion, and overall uncertainty.
Hilscher and Nosbusch (2010) found that rating premiums occur when the predictions of
economic fundamentals are more balanced. It may be that soaring oil revenues,
particularly for oil-exporting countries, generate a source of more easily obtained
revenue and that what is observable in this circumstance is another version of a “stability
premium” or a channel through which that premium can operate. Oil revenue may also
enhance a country’s ability to obtain improved access to capital markets.
Hill, Brooks, and Faff (2010) showed that the market premium may affect credit ratings.
A mixture
of mechanisms, which increased oil revenue caused, may be operating. Being
a net oil exporter increases the ability of a country to meet its external debts
and obligations. Therefore, it should be one of the major determinants of a country’s
credit rating.
Another factor that can influence SMEs’ financial side is a currency value in front of
foreign currencies or the exchange rate. Nomura Securities presented an analysis of
developing countries that are susceptible to currency crises (Nomura 2018). The
so-called Damocles index (by analogy with the Sword of Damocles in the ancient Greek
myth) ranks 30 emerging markets (countries) by their degree of exposure to currency
crises. The index is based on 13 calculation indicators, taking
into account such
macroeconomic indicators as the size of foreign exchange reserves, external debt,
imports, budget deficit, current accounts, and so on, which together predict the risk of a
currency crisis in the country in the next 12 months. Nomura’s presented analysis
identified a number of countries with a very low risk of currency shocks: Brazil, Indonesia,
the Russian Federation, and Kazakhstan. The authors of the report noted
a significant decrease in the risk of currency shocks in Kazakhstan in comparison
with the pre-crisis period against the backdrop of economic recovery and prudent
macroeconomic policies. The economy of Kazakhstan recovered from the
oil shock of
2014 thanks to a floating exchange rate, prudent macroeconomic policies, the restoration
of oil prices, and the return of economic growth in the Russian Federation. As a result,
the value of the Damocles index fell to zero, which indicates an extremely low currency
risk.