From June 2014 to January 2016, the price of Brent crude oil fell from $115 a barrel to less than $28 a barrel. Whilst this may have been welcome news for oil-importing economies, it caused dire straits to oil and gas producing nations. Kazakhstan is a major oil producer with the largest proven reserves in the Caspian Sea region. It exports nearly 75% of its production to generate a stream of foreign currency revenue.

Since the Kazakhstan tenge currency (KZT) is highly correlated with the oil price, over the same period it more than halved in value against the US dollar, prompting a secondary impact on foreign currency debt throughout the economy. Every dollar borrowed suddenly cost twice as much to repay. This inevitably spilled over into a classic emerging market banking crisis.

Over time, the oil price slowly recovered but the tenge remained weak and today trades around KZT 429 to the US dollar, in spite of nearly double-digit interest rates (current National Bank policy rate of 9.75%).  Yet out of the dust, the government developed a plan to insulate itself from future currency shocks.

As counter-cyclical fiscal expansion policies were embraced, a special local currency facility was made available to development finance institutions including ADB by the National Bank of Kazakhstan. The intention was to encourage these institutions to lend more in tenge, thereby mitigating foreign exchange exposure for domestic borrowers. The facility was deployed to support a raft of public and private sector projects, including for small and medium-sized businesses, which are logically the least able to understand or manage currency risk.

In a bid to invigorate the local capital market, the Kazakhstan Stock Exchange (KASE) allowed development finance institutions to issue bonds domestically whilst using their global medium-term note (GMTN) programs. Although unusual, this proved a lightning rod for the market, since bonds issued in this way are extremely straightforward to conceive, price, allocate, document and settle. Suddenly, time to market was cut from weeks to days.

Since the local private sector investor base was still licking its wounds from the currency crisis, the National Bank mobilized a series of sovereign funds to invest in development finance institution-backed local currency bond issues at yields at parity with the sovereign curve. This provided the institutions with a viable funding platform whilst ensuring that end-borrowers would have a competitive cost-of-funds.

Under the auspices of the G20 International Financial Architecture Working Group, much focus is given to local currency finance for developing countries. However, not enough gets done.

Over time, private sector investment recovered, allowing development finance institutions to rely less on the sovereign funds administered by the National Bank. Offshore KZT-linked bond markets have also thrived, although often these issues are swap-driven and don’t contribute to national development. Kazakhstan became one of the most active markets globally for local currency finance, whilst also embracing sustainability themes with innovative green and gender bonds.

Denominating large, long tenor budgetary support loans in local currency as an alternative to the USD remains challenging for market capacity reasons, however the Ministry of Finance has successfully galvanized state-owned enterprises into borrowing in tenge for project financing. These loans usually feature construction periods which require measured disbursements over longer timelines and can be satisfactorily funded through bite-size $30-40 million equivalent volumes in the local bond market.

Such a policy requires courage of conviction because the immediate impact is to increase borrowing costs for state-owned enterprises with local interest rates so much higher than for the dollar - hardly a panacea. But crucially, borrowings in tenge are not exposed to foreign exchange risk and are therefore insulated from the kind of currency shocks which ravaged the country five years earlier.

One item still on the To Do List for Kazakhstan is the attraction of more foreign portfolio investment to the bond market. Whilst short-term central bank bills are often sought-after by international investors, there is only nominal investment in long-term treasury bonds. This is surprising given the high domestic yields on offer, particularly at a time of diminishing returns in mainstream markets. The success of SE Asian markets such as Indonesia, Malaysia and Thailand in attracting international fixed-income investors offers a ready roadmap.

Under the auspices of the G20 International Financial Architecture Working Group, much focus is given to local currency finance for developing countries. However, not enough gets done. Whilst the private sector is generally a receptive audience; traction is more elusive with sovereign borrowers. Kazakhstan has become a rare example of a developing country that not only opts for local currency finance, but also contributes meaningfully to the solution.