Figure 6: Historical Decomposition of the Real Exchange Rate

Figure 6: Historical Decomposition of the Real Exchange Rate
Source: Authors’ compilation.
4. CONCLUSIONS AND POLICY IMPLICATIONS
Overall, SMEs are more vulnerable during economic turmoil than their larger peers.
Additionally, due to the direct effect of declined demand, SMEs suffer from liquidity and
creditworthiness problems as a result of the tight money supply and an increasingly risk-
averse banking sector. Overdue accounts receivable affect SMEs more severely than
large enterprises, as SMEs generally have a higher debt–equity ratio and possess less
cash on hand. In addition, SMEs are vulnerable to increased volatility in exchange rates.
All these factors narrow cash flows and can trap SMEs in financial trouble, making the
concerns of sustained financing of SMEs a crucial issue during an economic downturn.
Market mechanisms alone cannot solve this kind of exogenous factor problem because
of the inadequacy of capital in most SMEs and the deficiencies of the banking sector.
Banks and financial institutions (KASE) during downturns may also suffer from their own
Cumulative effect of oil supply shock on real exchange rate
2002
2004
2006
2008
2010
2012
2014
-0.
4
0.
4
Cumulative effect of aggregate demand shock on real exchange rate
2002
2004
2006
2008
2010
2012
2014
-0.
4
0.
4
Cumulative effect of real price of oil on real exchange rate
2002
2004
2006
2008
2010
2012
2014
-0.
4
0.
4
Cumulative effect of other shocks on real exchange rate
2002
2004
2006
2008
2010
2012
2014
-0.
4
0.
4
ADBI Working Paper 904
Y. Dosmagambet et al.
18
financial problems, and these in turn prevent lending. The combination of these factors
produces a disincentive for banks to lend to SMEs. Thus, the situation requires
government intervention to ensure SME sector survival.
Some authorities have found it necessary to adopt short-term, anti-crisis measures,
including increases in credit guarantee coverage, the adoption of credit guarantee terms,
recovery loans, and more liberal trade/export credit. Policy makers may also introduce
incentives for lending to the SME sector to financial institutions, especially providing
export credit, which is important to allow SMEs to foster trading with overseas markets.
However, it is necessary to align these measures through rigorous monitoring
mechanisms to avoid the misuse of such incentives and guarantee that they genuinely
generate positive externalities. For example, a number of authorities in Asia and the
Pacific issued decrees and laws and enhanced the relevant government agencies to
improve the financial conditions of SMEs as a response to the 1997–1998 Asian financial
crisis.
SMEs are a key driver of economic performance, a crucial source of employment
creation, and thus a major element of welfare and prosperity. SME development is the
main factor that can help to reduce the dependency of Kazakhstan on mining and natural
resource industries and the country’s risk of declining oil prices, thus making the
economy more resilient to the resource curse. In addition, SME development enhances
the potential of the innovation process in production and exports, contributing higher
added-value activities and the generation of more and better jobs. A large amount of
SMEs concentrate in the trade and service sectors due to the fact that these sectors are
characterized by low risk and modest start-up capital. Small numbers of SMEs operate
in the agriculture and manufacturing sectors, which increasingly generate employment
opportunities. A high concentration of SMEs in only a few sectors is an indicator of limited
support for SMEs in the usage of adjacent sectors and limited opportunities to diversify
the economy. Thus, the absence of access to bank loans constrains the expansion of
SMEs in Kazakhstan. The academic literature has argued that this limited access to
credit is due to the credit-rationing behavior of second-tier banks arising from asymmetric
information in credit markets.
CGSs are available through the Entrepreneurship Development Fund “Damu” JSC,
which provides loan guarantees of up to 85% to new entrepreneurs and a 50% guarantee
for operating or established entrepreneurs. By focusing the guarantees
on the priority sectors that the “Business Road Map 2020” program defined, the
government used the scheme to divert resources toward sectors that would diversify the
economy. However, the success of the CGS is highly dependent on second-tier banks
and their creditworthiness as an essential player in the final decision making and the
conditions of the loans, such as the interest rate.
Empirical analysis of oil prices and financial development (stock index) shows that, even
though the impact of shocks in the oil market on the stock index is absent in the short
run, the effect of shocks of the real price of oil, the aggregate demand, and the real
exchange rate gain importance as the time horizon increases, while the impact of supply
shocks is negligible throughout the period under review. We observe that the impact of
real oil price shocks on the stock index is about 61%, followed by a real exchange rate
of about 33% in the long run.
ADBI Working Paper 904
Y. Dosmagambet et al.
19
The policy implications of this research are that the overdependence of Kazakhstan’s
economy on the oil sector and the low diversification rate of the whole economy
undermine the development of an operational CGS. The main source of funding for the
CGS is the central government budget, and this is dependent on oil export revenue.
In other words, the CGS of Kazakhstan needs to rely less on the government budget and
more on collecting a premium from SMEs to reduce its vulnerability to oil shocks and
become sustainable. This relationship is two-sided: the CGS can support economic
diversification by helping to finance SMEs in non-commodity-based sectors. Therefore,
having a strong CGS will support the diversification process of the economy in
Kazakhstan.
In addition, to increase the sustainability and productivity of the CGS, it is important
to base the payable credit guarantee premium of SMEs to the guarantor on the credit
risk of SMEs. Those SMEs that have a better credit background need to pay a lower
premium rate than risky SMEs. In addition, it is important to base the guarantee coverage
for the banks on banks’ creditworthiness. A fixed guarantee coverage ratio involves
moral hazard. Healthier banks that manage their nonperforming loans need to receive
greater guarantee coverage than risky banks.
ADBI Working Paper 904
Y. Dosmagambet et al.
20
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