Country Report Kazachstan
The highest country risks for Kazakhstan lie in the political and social sphere. President Nazerbayev rules in an authoritarian manner and has no significant opposition. Corruption is embedded in the country and the attitude towards foreign investors is poor. The banking sector remains weak as it is still recovering from a default of the country’s third largest bank. Kazakhstan is endowed with a wealth of natural resources, but the economy is undiversified and depends too much on commodity exports. Substantial revenues from commodity exports have resulted in a sound fiscal balance and external position. Increasing output in oil, minerals and gas production will support economic activity in the coming years. For 2013, we estimate economic growth to be around 7%.
Economic structure and growth
Kazakhstan is geographically the largest of the former Soviet republics next to Russia. The country is endowed with a wealth of natural resources. It possesses enormous fossil fuel reserves and plentiful supplies of other minerals and metals, such as uranium, copper and zinc. It also has a large agricultural sector with livestock and grain. The country is landlocked and as such, the country relies on its neighbours to export its products, especially oil and grain. The country’s infrastructure is old and in general of poor quality, as modernization efforts did not begin before 2006. Although its Caspian Sea ports, pipelines and rail lines carrying oil have been upgraded, civil aviation and roadways have been neglected. Telecommunication and the information technology base are improving, but still require considerable investment. Supply and distribution of electricity can be erratic as regional power plants are prone to blackouts in the winter.
The services sector is the largest sector in Kazakhstan’s economy as it contributes 56% of the economy. Even so, the economy suffers from an overreliance on oil and extractive industries, leading to issues related to the so-called "Dutch disease”, such as an appreciating exchange rate. In response, Kazakhstan has embarked on an ambitious diversification program, aimed at developing targeted sectors like transport, pharmaceuticals, telecommunications, petrochemicals and food processing. In 2010, Kazakhstan joined the Belarus-Kazakhstan-Russia Customs Union in an effort to boost foreign investment and improve trade relationships. The government expects to join the World Trade Organization in 2013, which should also help to develop the manufacturing and services sector base. The country’s overreliance on the oil, minerals and metals sector was exposed during the global financial crisis years of 2008-2009. Economic growth rebounded from a low 1.2% in 2009 in the years thereafter and is estimated at 5.4% in 2012. Economic growth is expected to increase to close to 7% in 2013, supported by increasing output of oil, gas, metals and minerals. A downside risk is a slowdown of the Chinese economy, since China is Kazakhstan’s largest export partner. An escalation of the eurozone peripheral debt crisis will hurt demand from European export partners. Also, as the banking sector remains weak, stagnating credit growth could subdue economic activity.
The banking sector’s troubles centre on Kazakhstan's third largest bank, BTA bank, which defaulted in 2012 for a second time in two years. The second default of BTA Bank is not only negative for the bank itself, but also for the whole banking sector, as it undermines investor confidence in Kazakh lenders, and thereby has a negative impact on foreign investment in the country. Generally, the asset quality in the banking sector presents a persistent major source of concern, with non-performing loans (NPLs) still high at 37% of total loans in 2012. About half of these NPL’s are situated within the problem banks BTA Bank, Alliance Bank and Astana Finance. In response to the unresolved NPLs, banks have set aside capital to the size of about a third of their portfolio, which obstructs them from granting credit. The central bank had launched a Distressed Asset Fund (DAF, a bad bank) in July 2012 to restructure BTA bank after it defaulted. Furthermore, the DAF is intended to help the banks to put up their bad assets. It should also increase the transparency about the government’s contingent liabilities, as the government is expected to guarantee the bad debt and prevent the banks from becoming zombie banks, which do not have the capability to issue new loans. We expect credit growth to remain subdued in 2013, given that the restructurings in the banking sector will take time.
Political and social situation
President Nursultan Nazerbayev is the first and only ruler of Kazakhstan since the country became independent from the USSR in 1991. In the past 20 years, Nazarbayev has solidified his power base and, through changes of the constitution, established an authoritarian political regime that effectively guarantees his rule forever. Political opposition is weak and support for Nazarbayev in Kazakhstan’s parliament is very strong since he has many allies, as exemplified by the fact that it has given Nazarbayev the title “Leader of the Nation” (which exempts him from legal prosecution for life) in June last year. However, Kazakhstan’s authoritarianism differs somewhat from that in neighboring countries such as Belarus and Uzbekistan, as it relies less on coercion and allows for some (economic) freedom. However, press freedom is strictly limited, reflected by the press freedom ranking of 154th out of 178 countries by Reporters Without Borders. Also, corruption remains a major problem with Kazakhstan ranking 133rd out of 176 countries on Transparency International’s corruption perception index. An “independent” group of citizens tried to propose a referendum that would allow Nazarbayev to remain in office until 2020, thereby circumventing two elections. While 55% of the electorate supported this proposal, it was deemed unconstitutional by Kazakhstan’s Constitutional Court. In response to the decision, Nazarbayev brought forward the upcoming presidential elections, which had been scheduled for December 2012, to April 2011. As expected, Nazarbayev secured a victory with more than 90% of the votes and extended his rule until 2016. With Nazarbayev at the helm, Kazakhstan’s political environment has been very stable in the past decades and this will remain as long as he is in charge.
However, succession risks are a potentially large problem. Nazarbayev is 72 years old and there is no clear successor. This is partly due to the fact that Nazarbayev himself seems oblivious to the problem, as he stated that he will run again in the 2016 elections. However, without a clear successor, an untimely death of the Leader of the Nation could lead to increased political instability, as it may lead to infighting amongst the Kazakhstani elite.
Kazakhstan is striving to become a political and economic hub in Central Asia. It has increased its clout over neighboring Kyrgyzstan and further south over Tajikistan, and forged a partnership with the Turkmen leadership. Economic links to Russia will also remain strong as a result of the customs union between Kazakhstan, Belarus and Russia, which has been in place since January 2010. WTO accession is being pursued, but will also depend on the progress regarding WTO membership of the other customs union members, although each country is negotiating its membership with the WTO separately. The importance of China in Kazakhstan’s international relations has increased in the past years and maintaining good relations with China is currently a top-priority in Kazakhstan’s foreign policies. Both countries stand to benefit, as China is willing to invest heavily in Kazakhstan to secure access to its energy reserves while Kazakhstan wants to secure new export routes.
In general, Kazakhstan’s economic policies are rather prudent. However, the government’s attitude towards foreign investors and creditors is a large cause for concern, which reflects negatively on the business climate in general. There have been many cases in which foreign investors and creditors were left in the cold in times of trouble. For example, foreign creditors were forced to accept a large haircut during the restructuring of the banking sector, despite earlier statements that this would not be the case. In addition, Kazakhstan’s government has taken a tougher stance towards foreign oil companies in recent years, making use of environmental laws to force them to accept changes to earlier agreements.
The solid government finances are one of the country’s strengths. Note that in our data table and figure 3 the budget balance data excludes the transfers of oil export revenues to the National Fund of Kazakhstan (NFRK). As a result, the government budget falls from a surplus into deficit. Public debt is low at 16.6% of GDP, end2012. The budget surplus (including transfer from the NFRK) is estimated at 3.5% of GDP in 2012 and forecast at around 3% of GDP in 2013. Proceeds from oil exports are the largest source of government revenues, which are accumulated in the NFRK. The NFRK was set up in 2000 to reduce the economic impact of volatile oil prices and to save part of Kazakhstan’s oil income for future generations. It holds around USD 57bn in assets (end October 2012), all of which are invested abroad. Revenues from tax collections are weak. Corporate tax rates were cut from 30% to 20% in 2009, to counter the impact of the global financial crisis. However, these cuts were not reversed when economic growth picked up in the following years. The government even plans to cut the corporate tax rates further to 15% in 2014, which will increase the dependence on oil revenues. The bulk of the expenditures are made under Nazebayev’s modernization plan. The plan aims to diversify local economies, as many towns depend on only a single industry, improve labor mobility, increase education and healthcare spending and boost the business environment by tackling corruption and bureaucracy. Although this is a positive development, the plan is rather ambitious. Also, the Kazakh authorities have yet to prove that they can tackle the most challenging area: strengthening the judiciary and reducing nepotism and the widespread corruption.
As inflation eased from 8.3% in 2011 to 5.1% in 2012, the central bank (NBK) loosened monetary policy, also because it was eager to support credit growth in the banking sector. Since inflation is rising again and expected to average around 7% in 2013, further rate cuts are not likely. A high priority of the NBK is to ensure competitiveness of the non-oil domestic economy with its exchange rate policy. The exchange rate regime officially is a managed float, but the NBK allows very little flexibility in practice. The NBK routinely intervenes in the FX markets by buying foreign currency to prevent the local currency, the tenge, from appreciating excessively.
Balance of payments
Supported by commodity exports, which account for nearly 90% of total exports, Kazakhstan’s trade balance generally shows a large surplus of between 14% and 25% of GDP. The trade surplus recorded 25% in 2012, and is forecast at around the same level in 2013. In spite of the substantial trade surplus, the balance on the current account is subdued by large deficits on the services and income accounts due to the many foreign companies that are active in Kazakhstan. After an estimated current account surplus of 7.7% of GDP in 2012, we expect stable current account surpluses of around 8% of GDP in coming years. Even so, the high dependency on commodity exports remains a weakness. But since the current account is expected to remain in surplus in the coming years, no financing via the financial account is required. Even so, net direct investment flows are forecast to increase from USD 11.5bn in 2012 to almost USD 13bn in 2013 as foreign companies expand their investments in Kazakhstan.
Even though external debt is currently below its peak of 70% of GDP in 2007, it was still relatively high at 57% of GDP in 2012, due to significant foreign borrowing by the banking sector in the past. Since banks are reducing their reliance on foreign debt, total foreign debt is forecast at 55% of GDP in 2013. As such, this is a continuation of the trend that he level of foreign debt has been in decline since 2007. The large revenues from oil exports have enabled substantial repayments, a favorable development. Kazakhstan’s foreign debt mainly consists out of private sector debt and the maturity structure is favorable, as only around 10% of total external debt is short-term debt. Foreign exchange reserves are large, amounting to USD 27bn in 2012 and are expected to increase to USD 29n by end-2013. The reserves cover 75% of debt service due and 6 months of imports, which are sound levels. Moreover, Kazakhstan’s liquidity ratio is sound at 126%. Furthermore, these figures do not take into account the foreign currency saved in the National Fund of Kazakhstan, which amounted to an estimated USD 57bn in October 2012. As such, the external position of Kazakhstan is in healthy shape.