Banking systems of Azerbaijan, Georgia and Kazakhstan depend little on euro area direct investments

Banking systems of Azerbaijan, Georgia and Kazakhstan depend little on euro area direct investments

Azerbaijan, Baku, July 30 /Trend I.Khalilova/

There won't be a massive influx of Foreign Direct Investment (FDI) into the region's banking sectors for the next two or three years, credit rating service of Standard & Poor `s said.

"We expect FDI in Russian and CIS banking sectors to remain, at best, stable in absolute terms, and lower when compared to GDP, despite the countries' overall good growth prospects," the report of Standard & Poor `s said.

Russia and the CIS countries form a heterogeneous region in terms of politics, economics, growth potential, and size, since Russia accounts for about 80% of the region's GDP and 56% of its population.

Experts of Standard & Poor `s believe these countries have good medium- to long-term growth potential, although sustainable growth will depend on their capacity to implement structural reforms, especially limiting dependence on commodities and oil for some of them. Russia is by far the largest and most economically advanced country in the region, but commodities and oil also form the backbone of its economy.

Inflows have been at moderate levels in the past for the following reasons: most of the banking systems are fragile and often prone to cyclical build ups of imbalances and subsequent corrections, the countries' business environments are sometimes unfriendly to foreign investors, and their banking laws are generally weak.

Total inward FDI in these banking sectors, not just that from the eurozone, typically represents less than 5% of GDP and is just 1.4% in Russia and close to zero in Uzbekistan. Ukraine has the highest level of inward FDI in its banking system at 10% of GDP, while Georgia is at 4.6% of GDP.

"Thus In our view, any reduction in the investment and liquidity flows from eurozone banks would pose a direct threat to Ukraine, much less so for other banking systems. That said, indirect channels of contagion exist. Any deepening of the eurozone crisis with a durable negative impact on oil and commodities prices, equity markets, or local currencies could hurt these countries' growth prospects and indirectly weaken their banking systems," S&P said.

The constraints on foreign investors' appetites for Russian and CIS banking systems are:

· State banks' prominent roles and market shares in some of these countries through access to cheaper funding and

more creditworthy borrowers than private banks. This creates barriers for foreign investors, notably in Russia;

· The opacity of banks ownership structures;

· The generally weak quality of banking supervision and low level of independence of regulatory bodies;

· Inefficient protection of creditors' rights and the absence of a a well-functioning judicial system;

· The recent history of severe losses for international investors in some countries.

Our Banking Industry Country Risk Assessment (BICRA), which scores banking systems from the lowest risk (group '1') to the highest risk (group '10') highlights the relative riskiness of Russia and CIS banking systems in the global context.

BICRA's for Russia and CIS countries

Long-term foreign currency rating and outlook

BICRA

Economic risk score

Industry risk score

Russia

ВВВ/Stable

7

7

7

Kazakhstan

ВВВ+/Stable

8

8

7

Azerbaijan

ВВВ-/Stable

8

7

8

Georgia

ВВ-/Stable

8

7

8

Uzbekistan

N/R

8

7

9

Ukraine

В+/Negative

9

10

7

Belarus

В-/Stable

10

10

10

The Georgian, Azeri, and Kazakh banking systems feature low reliance on FDI from eurozone banks and are therefore insulated from the problems affecting these banks.

A large chunk of Georgian banking sector inward FDI comes from international financial institutions like the European Bank for Reconstruction and Development (EBRD; AAA/Stable/A-1+).

Unicredit is the only eurozone bank to have important operations in Kazakhstan, holding an 8.3% market share through its subsidiary ATF.

FDI in the Uzbek financial sector was a minimal $100 million, or 0.2% of GDP, in 2011, with no European banks being significant investors in this banking sector.

The ratio of inward FDI to GDP in the Russian financial sector remains very low by international standards. It has hovered between 1.6% and 2.0% of GDP since 2006 and has been trending down since the peak of 2009, which corresponds to the most recent banking crisis in Russia

France's Société Générale's (A/Stable/A-1) majority acquisition of Rosbank (not rated) in 2008 is the most recent significant entry of a foreign bank into the Russian market.

FDI in the Belarusian banking sector totaled $0.5 billion, or about 1% of GDP, in 2011, almost unchanged from the previous year, and 70% of it came from Russian state-owned banks.

"We believe the Ukrainian banking sector is the most vulnerable in the region to a slowdown in FDI and liquidity transfers. This is because 41% of Ukrainian banks' capital is in foreign hands, with Eurozone banks controlling 25% of the system. In addition, the country's financial sector is not self-sufficient in terms of capital generation and liquidity," the report said.

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