Context
Hard currency borrowing in Kazakhstan was popular until the Tenge currency collapse in 2014-2015. Borrowers then started looking for local currency financing, but the local market for long-term financing was under-developed. Local currency financing is particularly critical for municipal infrastructure and the utilities sector, where companies’ entire revenues are derived in local currency, and where companies cannot afford to take on foreign exchange risk.
Problem
- Long-term local currency financing is scarce in Kazakhstan. It is only available under state support programs targeting large investment projects for strategic sectors and affordable housing.
- The only alternatives were prohibitively high fixed-rate loans.
- Utility projects not eligible for state support would either have to borrow in US dollars or take on high-rate loans which they could not afford.
Innovation
- EBRD established an agreement with the National Bank of the Republic of Kazakhstan (NBRK). The agreement comprises a USD400 million repurchase agreement and a USD600 million swap framework enabling EBRD to source up to USD1 billion in Tenge for on-lending to local financial institutions, municipalities, and corporations.
- EBRD introduced the concept of CPI-linked local currency loans to public and private companies, primarily without a sovereign guarantee.
- The bank’s local currency portfolio in the sector consists of 25 projects in water and wastewater, district heating, public transport, and street lighting sectors.
Stakeholders involved
- European Bank for Reconstruction and Development (EBRD): Provides funding through lending in central Europe, Asia and the Mediterranean to projects that could not attract favorable financing on commercial terms
- National Bank of the Republic of Kazakhstan (NBRK): The Central Bank of Kazakhstan. It is 100% state owned.
Timeline
Results and impact
- Financing was extended to a larger number of private and public utility companies. The bank’s local currency portfolio in the sector consists of 25 projects in the water and wastewater, district heating, public transport, and street lighting sectors.
- EBRD enabled utilities to invest affordably in their infrastructure compared with the alternatives of borrowing in US dollars or taking out expensive government loans that were not CPI-linked.
- As a result of this, utilities were able to modernise their infrastructure to achieve energy efficiencies, environmental improvements through reduction of GHG emissions, and reliability of services.
- EBRD built sector capability by facilitating policy dialogue with the Government of Kazakhstan on enhancing sector regulation, CPI-linked finance, the green economy transition, and commercialisation.
Key lessons learnt
- Local currency, CPI-linked financing was able to mitigate the financial risks of the borrowers as it is better aligned with movements in tariff.
- In light of the Tenge depreciation, local currency financing contributed to the affordability of the investment programs.
- Project fundamentals that were critical to success included:
- Selection of projects with potential for operations and maintenance efficiencies, making the investment more attractive;
- Selection of clients that were committed to increasing operational performance and improving corporate governance
- Structuring of projects with careful risk allocation.
