Moody's: Banks of Azerbaijan, Kazakhstan and Georgia constrained in long-term financing of Middle Corridor

While the direct involvement of commercial banks of Azerbaijan, Kazakhstan and Georgia in financing the Middle Corridor will be limited, banks will still benefit significantly from the resulting uptick in economic activity, Report informs referring to Moody's.

"The region's commercial banks are not expected to play a significant direct role because the primary funding sources for the project are government, government-owned entities, international development banks and private investors.

Commercial banks can help finance supplementary infrastructure. However, almost 80% of Kazakhstan banks' and almost 90% of Azerbaijan banks' funding is short-term, which, alongside high financing costs, prevents banks from engaging in long-term lending and from expanding their long-term loan portfolios. Georgian banks also face high financing costs, but, beyond deposits, they have moderate reliance on market funding, mostly driven by good access to long-term funding from developmental international financial institutions, which made up 60% of their market funding.

In Kazakhstan and Azerbaijan, banks' credit to the private sector remains limited, accounting for 25% of GDP in Kazakhstan and less than 20% in Azerbaijan. This compares to equivalent bank lending of 66% of GDP in Georgia," reads the update.

Kazakhstan's private sector, with government backing, is expected to become more actively involved in the long-term financing of the real economy. Additionally, private banks, particularly the largest ones, are using their resources to become more involved in infrastructure projects. Their participation in the Middle Corridor is likely to be indirect, for example, by financing supplementary logistics and hubs and through other investment projects. 

The increased economic activity generated by this project and other government initiatives will bolster the corporate and SME sectors and boost wealth. This will improve banks' capacity to diversify and manage asset risks more effectively. Increased income levels will also boost their retail portfolio.

A wider franchise will increase and diversify banks' earnings, helping boost profit, while a stronger monetary base will support deposit inflows, increasing liquidity.