Country Report Kazakhstan
Kazakhstan had a less fortunate economic year in 2013, as weak exports led to a twin deficit and economic growth, though picking up, was driven by unsustainable consumer borrowing.
Strengths (+) and weaknesses (-)
(+) Ample natural reserves
Abundant hydrocarbon and mineral reserves have attracted a steady flow of foreign investments. Revenues from exploration have enabled Kazakhstan to build a sound fiscal and external position.
(-) Narrow economic base
The Kazakh economy and exports are highly reliant on the extractive industries and are therefore very susceptible to the volatility on commodity markets.
(-) An environment hostile to private sector development
A high degree of state intervention and corruption, against the backdrop of poor infrastructure in a landlocked and sparsely populated country, make it very difficult for the private sector to develop. Moreover, a weak banking sector lacks the capacity to support the private sector financially.
(-) Vulnerability to leadership change
The Kazakh regime is a top-down political system revolving around President Nazarbayev. A change of leadership, not unlikely given the president’s advanced age, might threaten stability, especially because there is no clear successor.
1. Sustainable growth or another credit bubble?
In 2013, the Kazakh economy picked up and one of the main drivers was an upsurge in domestic consumption, on the back of a boom in consumer borrowing. The pickup in credit was not matched by an increase in real wages and, hence, raises concerns about the creation of a credit bubble, an additional threat to an already weak banking sector. It is therefore seen as a positive that the Central Bank is concerned with this development and considers increasing capital requirements for non-mortgage loans.
Economic growth is estimated to have picked up from 4.9% in 2012 to 5.3% in 2013. Data on 1Q-3Q 2013 revealed a 5.6% growth rate supported by a 16% increase in consumer spending, despite real wages having grown by only 0.8% over January-October. Information from the Kazakh financial authority reveals a 46% upsurge in non-mortgage consumer loans between 1 January and 1 December 2013. Despite restructuring and deleveraging after the 2007-2009 crisis, the Kazakh banking sector still struggles with a high rate of non-performing loans (around 30%) and thin profit margins. NPL’s are lower amongst consumers, but recent aggressive retail lending, not matched by an increase in income, is poised to change that.
2. Weak exports lead to a twin deficit
Delays at the offshore Kashagan oil field and low metal prices affected exports and the narrowing trade surplus resulted in an estimated current account deficit of 0.5% of GDP. Weak exports also affected government revenue, roughly doubling the budget deficit from 1.5% of GDP in 2012 up to 2.5% of GDP in 2013. However, reserves accumulated in the National Fund (NFRK) provide sufficient cover for both shortfalls. Foreign exchange reserves including the fund amount to USD 92.7bn, or 18 months of import cover, and the budget balance after the yearly USD 9bn transfer from the fund is estimated to book a surplus of 1.7% of GDP. Moreover, net FDI remained strong, at USD 6.1bn in the first three quarters of 2013 and comfortably finances the current account deficit. In 2014, the current account balance is expected to turn into a modest surplus of 0.5% of GDP, while the budget deficit will also improve slightly to 2.1% of GDP.
3. Pension system nationalized, affecting capital markets and, possibly, future returns
In 2013, the government started reforming the pension system to prevent expenses from becoming unsustainable in the future. The authorities want to increase returns on pension savings by lowering administration costs and by directing a part of the funds to the real economy. However, nationalizing all private pension funds, which is part of the reform, could actually make matters worse and seriously hurt domestic capital markets. Ten existing private pension funds, holding assets worth USD 22.5bn (10% of GDP), will be merged with the state owned fund before 14H2. The new fund will be owned by an independent agency and will be managed by the central bank. However, considering the returns of the current state-owned fund, the government might reach the goal of reducing expenses, but there are serious concerns about future returns. Furthermore, the government’s ownership of the fund means portfolio management decisions could become more political. On the positive side, 50% of the pension funds consists of sovereign debt, so the merger will lead to a significant drop in the already low level of public debt (15% of GDP in 2013). For the domestic capital markets, however, the move represents a significant deterioration because the pension funds are important buyers of domestic corporate securities. On top of that, the increasing degree of state intervention might deter foreign investors.
4. Cementing ties with China, in line with plans to become a Euro-Sino transit hub
In 2013, agreements with China cemented the relationship between the two countries, placing Kazakhstan in a better position to reduce its reliance on gas exports to Russia. Most of the deals were related to the energy sector, but a significant part of the deals support the Kazakh government’s plan to diversify away from hydrocarbons, towards becoming a transit hub between Europe and China. A state visit by Chinese President Jinping in September 2013 was a key event in the consolidation of business between the two neighbours. The event led to deals worth USD 30bn, including the completion of China National Petroleum Corporation (CNPC) purchase of an 8.33% stake in the Kashagan offshore oil field, the first acquisition of a major offshore Caspian energy project by a Chinese company. The agreements also included a USD 8bn loan to state company Bayterek for supporting industrial projects and innovative initiatives. The latter is in line with the Kazakh government’s new infrastructure development programme, “New Silk Way”, which aims to tap into Kazakhstan’s strategic location and transform the country into a transit hub between Europe and China. The alignment of Kazakh and Chinese interests bodes well for financing of the infrastructure development programme, while the increasing ties in the energy sector allow Kazakhstan to reduce its reliance on Russia for gas sales.
Kazakhstan is the largest ex-Soviet Union state and the ninth largest country worldwide, but it is sparsely populated with 17 million inhabitants (13th lowest population density worldwide). The extractive sector, the backbone of the economy, is dominated by international companies, which finance their activities from their foreign parent companies. Consequently, Kazakhstan has a high level of private foreign debt. The state is strongly present in the economy. Its investment holding company, Samruk Kazyna, holds assets totalling 50% of GDP, divided over the oil, gas and financial sectors. The participation in the financial sector is a consequence of a bail-out after the 2009 crisis, when the banking sector was overhauled. China is the most important business partner for Kazakhstan due to its share in trade and investments (China currently holds 24% of the oil sector).
Kazakhstan gained independence from Russia in 1991 and became a multiparty state in 1993. However, 21 years of constitutional changes have allowed President Nazarbayev to establish an authoritarian political regime that guarantees his rule endlessly. However, the advanced age and rumours about poor health of the president indicate that a change of leadership is imminent and it is worrisome there is no clear successor. Parliament lacks a genuine opposition and political space has been reduced since 2011, after violent protests triggered the president to step up his repression of dissent. Press freedom is restricted and corruption is persistent. In the long term, Islamic extremism fuelled by socio-economic tensions and a security vacuum in neighbouring Afghanistan could become a problem for the country. Kazakhstan has historically developed strong ties with Russia and joined a customs union orchestrated by their neighbour, together with Belarus, in 2010.