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. Last Updated: 07/27/2016

Credit Crunch Snaps Kazakh Boom

ALMATY, Kazakhstan -- The global credit crunch is taking its toll on Kazakhstan's long-booming construction sector, silencing building sites and putting pressure on the country's already highly leveraged banks.

The sharp rise around the world in lenders' risk aversion, induced by defaults on U.S. home loans, has hit Kazakhstan hard and raised refinancing risks for its banks that have relied heavily on foreign debt to fund growth.

Unable to secure funding, many construction companies have cut their activities, bringing their building sites to a standstill in the financial capital, Almaty, and elsewhere.

"There are estimates that up to 90 percent of construction companies' activities are being funded through borrowing," National Bank chairman Anvar Saidenov told reporters last week.

Like many other ex-Soviet states, Kazakhstan has been rapidly rebuilding its aging infrastructure on the back of high oil revenues, with construction sites of new roads, hotels, offices and shopping malls sprouting across the country.

Now the boom is beginning to fizzle out in a country where almost one-quarter of all domestic lending goes to the building sector, analysts say. Construction accounted for just over 8 percent of Kazakhstan's $80 billion economy in 2006.

"Kazakhstan is not a very diversified economy and on the domestic side the most developed sectors have been banking and construction," said Okan Akin, an analyst with Bear Stearns.

"Most probably we'll see the full impact of this in the next six months." However, the Kazakh central bank believes the worst liquidity problems are over, while acknowledging the 10 percent economic growth target for this year will probably not be met.

Players on the real estate market say the volume of deals fell dramatically after property prices peaked in the summer.

According to real estate company Absolut, the average price of a square meter in Almaty fell 5 percent in September and a further 3 percent so far this month to $3,400.

"One of the banks we spoke to estimated the real estate market could end up clearing 40 percent lower," said one Western analyst who visited Kazakhstan earlier this month.

Analysts say it will take time for the market to recover. The government is stepping up efforts to provide a cushion for the slowing growth by helping refinance banks' mortgages.

"The government will take necessary measures," Kazakh Economy Minister Bakhyt Sultanov said. "We are currently examining the possibility of adding capital to the State Mortgage Company which can provide additional liquidity for banks by refinancing their loans."

Some analysts said the exposed weakness of Kazakhstan's financial architecture, coupled with the government's unresolved row with a Western consortium developing a big oil field in the Caspian Sea, has hurt investor sentiment.

But Grigory Marchenko, head of Kazakhstan's least-affected bank, Halyk Bank, said those problems were exaggerated. "The economy remains very liquid. Those who borrowed a lot abroad ... are facing problems: same with construction companies," said Marchenko, a former central bank chairman.