Financial Risk Management

Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk), liquidity risk and credit risk.  The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.  The Group does not use derivative financial instruments to hedge risk exposures.

Risk management is carried out by management under policies approved by the management committee. The management committee provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk.

Credit risk

The Group takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.  Exposure to credit risk arises as a result of the Group’s sales on credit terms and other transactions with counterparties giving rise to financial assets.

The Group’s maximum exposure to credit risk by class of assets is as follows:

In thousands of Kazakhstani Tenge Note 31 December
2012
31 December
2011
Cash and cash equivalents   3,075,138 1,352,996
Trade receivables 10 11,269,608 8,974,138
Due from related parties 6 29,546 2,196,784
Restricted cash 9 75,211 19,164
Total maximum exposure to credit risk   14,449,503 12,543,082

The Group has policies in place to ensure that sales of products and services are made to customers and distributors with an appropriate credit history. If corporate customers are independently rated, these ratings are used.  Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer taking into account its financial position, past experience and other factors. The Group’s management reviews ageing analysis of outstanding trade receivables and follows up on past due balances.  Customers that fail to settle their liabilities for mobile services provided are disconnected until the debt is paid.  Management provides ageing and other information about credit risk in Note 10. The carrying amount of accounts receivable, net of provision for impairment of receivables, represents the maximum amount of trade receivables exposed to credit risk. The Group has no significant concentrations of credit risk since the customers portfolio is diversified among a large number of customers, both individuals and companies.  Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provisions already recorded.

The Group has established relationships with a number of banks, which are considered at time of deposit to have minimal risk of default.  The Group accepts only those banks in Kazakhstan that have highest credit ratings. The Group reviews credit ratings of those banks periodically to decrease credit risk exposure. As the Republic of Kazakhstan continues to display some characteristics of an emerging market certain risks inherent to the country are also inherent to the banks where the Group placed its cash and cash equivalents and term deposits at the end of the reporting period.

Foreign exchange risk

The majority of the Group’s purchases of property, plant and equipment and inventories, as well as certain services such as roaming are denominated in US Dollars. Hence, the major concentration of foreign exchange risk arises from the movement of the US Dollar against the Tenge. Due to the undeveloped market for financial instruments in Kazakhstan, the management does not hedge the Group’s foreign exchange risk.

At 31 December 2012, if the US Dollar had weakened/strengthened by 10% percent against Tenge with all other variables held constant, after-tax profit for year ended 31 December 2012 would have been 42,517 thousand Tenge lower/higher (2011: 81,779 thousand Tenge higher/lower), mainly as a result of foreign exchange gains/losses on translation of US Dollar denominated bank balances, receivables and payables. Profit is less sensitive to movement in Tenge/US Dollar exchange rates at 31 December 2012 than at 31 December 2011 because of the decreased amount of US Dollar denominated trade and other payables in 2012.

Cash flow and fair value interest rate risk

The Group’s income and operating cash flows are substantially independent of changes in market interest rates.  The Group does not have floating interest bearing assets and liabilities as of 31 December 2012.

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash.  Due to the dynamic nature of the underlying businesses, the Group’s treasury aims to maintain flexibility in funding by keeping sufficient cash available.

The table below shows financial liabilities at 31 December 2012 by their remaining contractual maturity.  The amounts disclosed in the maturity table are the contractual undiscounted cash flows.  When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date.  Foreign currency payments are translated using the spot exchange rate at the reporting date.

The maturity analysis of financial liabilities at 31 December 2012 is as follows:

In thousands of Kazakhstani Tenge Demand and less than 1 month From 1 to 3 months From 3 to 12 months Total
Liabilities        
Borrowings 2,750,000 1,200,000 45,040,985 48,990,985
Trade payables 10,664,606 - - 10,664,606
Dividends payable - - 8,000,000 8,000,000
Due to related parties 318,187 - - 318,187
Total future payments 13,732,793 1,200,000 53,040,985 67,973,778

Comparative maturity analysis of financial liabilities at 31 December 2011 is detailed below:

In thousands of Kazakhstani Tenge Demand and less than 1 month From 1 to 3 months From 3 to 12 months Total
Liabilities        
Trade payables 7,426,804 1,671,031 185,671 9,283,506
Due to related parties 380,946 - - 380,946
Total future payments 7,807,750 1,671,031 185,671 9,664,452

Management believes that the payments of the borrowings, the remaining of the dividends and other financial liabilities will be financed by cash flows from operating activities and that the Group will be able to meet its obligations as they fall due. The Company can extend borrowings up to an additional twelve month, subject to consent of the lenders (Note 13).

Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for owners and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.  In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to owners, return capital to owners, issue new capital and sell assets to reduce debt.