We part with 2007 with mixed feelings. Our economy continued to grow at a rapid pace, and according to preliminary estimates achieved an 8.7% growth rate in 2007. However, this was also a year, which put the strength of our financial system to test. Recent turmoil that affected financial systems worldwide has reached Kazakhstan as well. Events like this underscore the degree to which capital markets have grown to rely on one another.

Increased volatility of the financial markets and poor visibility of prospects of the global economic growth have contributed to the downgrade of Kazakhstan's sovereign rating by several rating agencies. Tightened funding conditions have adversely impacted the ability of Kazakh banks to attract external financing. As a result, it is expected that the Kazakh economy will moderate its growth in 2008.

The authorities are fully aware of these challenges; they are prepared to take decisive and coordinated steps to mitigate the potential adverse effects of tightened global credit conditions, and to adopt the structural measures needed to solidify recent progress and to strengthen the Kazakh economy.

The Government of the Republic of Kazakhstan, the National Bank and the Financial Supervision Agency (FSA) have developed a rigorous plan for coordinated and coherent effort by all government agencies, regulators, and the banking system aimed at alleviating pressures arising from tightened funding conditions in global capital markets.

Maintaining the stability of the financial system and containing the systemic risk that may arise in financial markets is central to the National Bank's mission. The National Bank will act to ensure price stability and sustainable growth. Monetary policy will be conducted with the primary goal of containing inflation at levels below 10%.

A healthy banking system is important to the economic stability of Kazakhstan. The National Bank will continue to support the banking system by engaging in open market operations, providing loans to individual institutions and in certain cases, currency swaps. It will do so in a fair and transparent manner that will avoid a general bail-out of the system, and that will spread the costs equitably amongst the various parties, not least bank owners.

The Government will also encourage banks to explore alternative sources of finance, such as equity listings and sale of convertible bonds, or other equity-like products on local exchange. Banks will also explore the possibility of securitization of their credit portfolios. We believe that such efforts will help banks strengthen their balance sheets. FSA and the National Bank are prepared to support commercial banks in these efforts and help them, within limits, to lessen their dependence on external debt financing. In so doing, the authorities will keep foremost in mind the need to find and keep the proper balance between getting to a soft landing on the banking situation; not impairing the credit rating of the country; and avoiding creating moral hazard by the careful use of reserves and the assets of the National Fund of the Republic of Kazakhstan.

Changing conditions in capital markets require adaptive response from government agencies and regulators alike. Vigilant monitoring is required for early detection and timely response to potential threats to the financial system. Our plan includes improving governance and transparency of the banking system so as to allow more effective market discipline, and strengthening bank supervision by the FSA; this requires curtailing related party lending, improving the technical capabilities of the Agency and increasing its staff, and improving the collection of market data critical for timely decision making. FSA will actively encourage banks to review and revise their risk management practices and conduct stress testing of their portfolios. The National Bank and FSA will also carefully track changes in the world financial markets, conduct cogent analysis, and prepare policy recommendations for the Government.

As commercial banks tighten their lending operations in response to the changes in the global funding conditions, some creditworthy borrowers may not get access to financing. Such effects can be observed in certain areas of in-process construction today. Construction companies heavily rely on bank credit. Due to the funding issues, even reputable construction companies are facing difficulties with completing construction of multiple-family housing units. Providing adequate housing to citizens of Kazakhstan is one of the basic duties of the Government. In order to alleviate pressures on the construction industry, support job growth and to help mortgage owners secure their housing, the Government will provide alternative sources of financing via several government-owned vehicles. A pilot project was launched in 2007 for Astana region, with more regions planned for inclusion in 2008.
Maintaining healthy job growth and supporting small-and-medium enterprises is one of the goals for 2008. The Government will address this by enhancing development of Public-Private Partnerships. Regulatory and legal framework is currently under revision to accommodate the needs of these vehicles. We believe that joining resources of the private and public sector in various sectors of Kazakh economy will produce measurable results and promote sustainable growth of the economy.

To preserve social stability, the Government will also put in place appropriate safety net measures designed with fiscal prudence in mind to mitigate the impact of the expected slow down in growth on the welfare of the poorest Kazakh people, especially in lagging regions.

Overall, although the situation remains fragile and some aspects of international funding issues are outside of our control, we believe that current challenges create an opportunity for the Government to take full advantage of these issues and push through structural reforms that will meaningfully contribute to the sustained and equitable economic growth of the country.