Country Report Kazakhstan
Kazakhstan had a less fortunate economic year in 2014, caused by the decreasing oil price in the second half of last year and the negative wealth effects as a result of the tenge devaluation. For 2015, substantially lower economic growth and twin deficits are expected.
Author: Jan-Willem van Tongeren (trainee)
Strengths (+) and weaknesses (-)
(+) Ample natural reserves
Abundant hydrocarbon and mineral reserves have attracted a steady inflow of foreign investment. 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
After the independence from Russia (1991) an authoritarian political regime has been established around president Nazarbayev, which guarantees his rule endlessly. Nazarbayev’s advanced age and rumours about his poor health indicate that a change of leadership is imminent. As the parliament lacks a genuine opposition and there is no clear successor this might threaten Kazakhstan’s stability.
1. Economic growth expected to decrease strongly
Kazakhstan is highly dependent on mining industries and in particular on the hydrocarbon sector, which accounts for approximately 60% of total exports and more than 25% of GDP.
In 2014, real GDP growth slowed markedly to 4.3% from 5.9% in 2013 due to weaker domestic and external demand. This came as a consequence of the sharp decrease of the oil price during the second half of last year, the devaluation of the local currency in February 2014 (-19%) and weaker external demand from China and Russia for Kazakhstan’s commodity exports. Private consumption, in particular, was hit hard by the negative wealth effect resulting from the devaluation, a tightening of lending conditions for consumer loans, and the delayed impact of the slower growth of real wages in 2013. Because of the devaluation, domestic inflation (CPI), increased gradually to 7.4% year-on-year in December 2014, due to higher imported input prices.
The combination of the above mentioned events have had a serious impact on Kazakhstan’s economy. For 2015, the economic growth is expected to fall significantly to 0.8% (e.g. average growth in the previous five years: 6% year on year) on the back of a further weakening of consumption and export growth, resulting in deficits of both the current account and budget balance. It is expected that this situation will only improve if the oil price increases above the fiscal break-even oil price of approximately USD 80 bbl. However, Kazakhstan has shown prudent management of the public finances and reserves accumulated in the National Fund (NFRK) provide sufficient cover for both shortfalls.
2. A further devaluation of the tenge?
In 2013, Kazakhstan pegged its tenge to a basket of currencies (70% USD, 20% euro, and 10% ruble respectively) in order to smoothen excessive exchange fluctuations. Although the tenge was overvalued, which led to a loss of competitiveness of local industries, the 19% devaluation in February 2014 was not foreseen. It was the second devaluation in five years (23% in 2009) and once again, it had a serious impact on households, companies and foreign investors. The authorities, however, justified the devaluation as a response to the deterioration in the current account balance, concern about competitiveness due to depreciation of the Russian ruble, and a fall of the central bank’s international reserves. There is still pressure on the tenge, as the ruble depreciated even further after the last tenge devaluation and households and companies are trying to hedge by converting their tenge-savings into USD (about 55% of all deposits are FX-denominated). Meanwhile the central bank is spending billions of its gold and FX-reserves and is closing currency swaps to support the currency. As the decreased oil price generates less USD income, it makes Kazakhstan more vulnerable and another devaluation might occur.
3. Vulnerable banking sector
Prior to the global financial crisis, Kazakhstan experienced a high and unbalanced growth to large extend fuelled by a credit boom. This resulted in increased foreign debt and FX-denominated loans. As financial conditions tightened with the onset of the global financial crises, banks lost access to foreign financing and were forced to deleverage aggressively.
Combined with the tenge devaluation in 2009, this led to a significant increase of NPL’s and government intervention was needed to support banks. Although the government aimed at reducing the large stock of NPL’s, e.g. by tax exemptions for write-offs and a Problem Loan Fund, the progress has been limited so far. At the end of 2014, NPL’s - mainly reflecting loans to corporations and SME’s - still constitute for about 25% of total bank loans. This combined with the large share of FX-denominated loans and savings has made the financial sector vulnerable to external shocks. Currently about 30% of all bank loans and 55% of all savings are FX-denominated. The last is substantially influenced by the tenge devaluation in 2014.
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 activities are financed by 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 government 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, 22 years of constitutional changes have allowed President Nazarbayev to establish an authoritarian political regime that guarantees his rule endlessly. However, his advanced age and rumours about poor health of the president indicate that a change of leadership is imminent. In this regard it is worrisome there is no clear successor. The country’s 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 the Eurasian Economic Union in 2015.