Kazakhstan's Construction Collapse

The global financial crisis has hammered the building business in Central Asia's largest country. Recovery will depend on the oil market

By Abdujalil Abdurasulov

Shouts of "Give houses to the people!" rang out when casualties of Kazakhstan's collapsing construction industry gathered in an Almaty square earlier this month. Many in the crowd said they were homeless after taking out mortgages on apartments that were never built. Once the symbol of boom times in Kazakhstan, today the construction sector reflects the economic slowdown and the country's vulnerability to the global financial crisis.

Many heavily indebted construction companies, big and small, have stopped work, although they may not have declared bankruptcy. Over the past months, the sight of abandoned concrete apartment blocks and cranes standing idle has become common in Kazakhstan's cities.

Such scenes are a personal matter for Igor. Like many other protesters on the square in the country's commercial capital, he took out a bank mortgage. His house was supposed to be finished in December, but it's far from being completed, he said.

Igor, 35, sells used cars and he spends almost all his income on monthly payments to the bank.

"I wanted my bank to freeze the mortgage payments until the construction is resumed. However, they refused," he said. "I'm going to sue the construction company and demand that it pays the bank all my mortgage debt."

Igor understands that he will most likely lose. If that happens, he said he'll simply stop paying the bank.

An additional problem is that Igor's mother is the guarantor of his mortgage. So Igor said he will sell her house and his car so the bank won't be able to seize them for unpaid debt.

Igor has already paid $70,000 on his mortgage. "But I can't keep paying for something that does not exist," he said.

A BOOM BUILT ON DEBT

Other homebuyers who did not want to take out a mortgage are in a no less difficult situation. "I sold my apartment in Astana, sold my car, borrowed money from my friends to buy a flat in Almaty in one of the construction projects," Roman Malikov, 34, said. "And now I don't have my old flat or my new one. I'm homeless."

Construction companies were among the first to feel the swelling global liquidity squeeze in Kazakhstan a year ago. These companies were heavily dependent on bank credit to buy land and building materials, so when Kazakh banks, themselves heavily in debt, stopped giving loans and instead put pressure on builders to pay back their loans, many collapsed. Builders also raised cash outside the banking system by selling not-yet built apartments to fund current building projects, but many of those projects now also have ground to a halt.

According to the National Bank of Kazakhstan, the country's foreign debt stood at $100.6 billion as of 30 June, $45 billion of it owed by banks. Numbers like these pushed foreign financial institutions to stop lending to Kazakh banks once the early signs of the crisis started surfacing. "From the second half of 2007, Kazakh banks were no longer able to raise cheap funds as they did before," said Gairat Salimov, an analyst in Almaty with the Renaissance Capital investment bank.

"Thus [banks] started cutting down lending, reducing their portfolios, and repaying their debts. This had a serious impact on the Kazakh economy, which was significantly driven by credit expansion," Salimov said.

Many companies in construction and other parts of the economy could not survive without bank credit. Small and medium-size businesses were particularly hit. Consumption dropped, and GDP growth is expected to decline from the average of 10 percent that was recorded for the past few years to 5 percent in 2008. Compounding the misery, the annual inflation rate reached 20.1 percent in August.

Astana is concerned that people's anger from their losses may turn against the government. During a speech to legislators in October, President Nursultan Nazarbaev said that people's difficulties were "caused by the global financial crisis that came from outside and not because there were mistakes made domestically." Members of the opposition, particularly the Azat party, criticized the government, saying that it was responsible for the recent economic hardships, and in November called on the cabinet to resign.