Kazakhstan Chamber of Commerce in the USA

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Bouncing back

Posted on November 04, 2011 by Alex

This year sees Kazakhstan well on its way toward a robust recovery. By Ben Aris

Kazakhstan is rebounding swiftly from the worldwide economic downturn, with the country’s economy looking set to surge due  to the advent of fresh oil and gas from the Kashagan offshore field.

Kazakhstan went into the 2008 crisis early. The republic’s banks had been enjoying triple-digit growth for several years, largely funded by loans and bonds drawn from the international credit markets. So, as the US subprime mortgage crisis unfolded and the credit markets dried up in 2007-08, the Kazakh banks were among the first to suffer.

However, thanks to swift action from the National Bank of Kazakhstan (NBK) and more than $4 billion in liquidity support to the banking sector, Kazakhstan came through the storm.

First in, first out. After commodity prices – particularly oil – started to recover in 2010, so too has the economy. But the republic is not out of the woods yet and a lot of clean-up work remains to be done. The banking sector still has a backlog of non-performing loans (NPL), though the strong performance of the country’s energy and mining sectors resulted in stronger-than-expected growth in 2010.

Banking regains buoyancy

The situation in the banking sector is gradually returning to normal after agreements on debt restructuring at BTA Bank, Alliance Bank and TemirBank. Having fallen hard during the crisis, Kazakhstan’s banking sector is now poised to outperform most of those in neighboring countries as it bounces back, according to investment banks such as Renaissance Capital.

Thanks to a progressive reform program in the previous decade, the structure of the Kazakh financial sector is still one of the best in the former Soviet Union and should return to growth once the issue of debt restructuring is resolved. Analysts estimate it will take around another two years for the problems of NPL to be fully worked out.

In the short term, commodity prices will determine exactly how the rest of 2011 pans out. But the unrest in North Africa in the first quarter of the year has already driven oil prices – the key contributor to Kazakhstan’s financial health – higher than most had been forecasting at the start of the year. This boost buys the government more time to drive through its wide-ranging reform program.

Kazakhstan’s economy grew by seven percent in 2010 and is forecast to continue its recovery in 2011 in the four to five percent range. The services sector is estimated to account for 51.8 percent of the country’s GDP in 2010, with industry comprising 42.8 percent, and agriculture at 5.4 percent.

The oil price is expected to average in the order of $90 for 2011, and this will give a boost to budget revenues. Meanwhile, the government is maintaining its extremely conservative oil-price assumption of $65 in the budget, which will almost certainly give it plenty of room for maneuver.

In general, as the economy begins to recover, so too should the public finances. Budget revenues totaled $30 billion in 2010 – up 46.5 percent from 2009, and 6.5 percent above 2010 government projections – and the budget deficit was set at $5.5 billion (4.1 percent of GDP).

A robust recovery is expected to lead to an improvement in the government’s fiscal position. The state budget for 2011-13 has been adopted with a much lower deficit of 2.8 percent in 2011, based on additional revenues of $2.8 billion from a doubling of the oil export duty in 2011 to $40 per metric tonne.

In the clearest sign yet of a return to economic normality, the NBK ended its control of the exchange rate in February and returned to a managed float system. The Kazakh currency, the tenge, is expected to remain relatively stable against the dollar throughout 2011, although there may be some slight appreciation, say analysts.

One of the most difficult economic challenges that the country faces is coping with inflation. Consumer price inflation in Kazakhstan in 2010 was in line with Renaissance Capital’s 7.7 percent forecast and was mostly driven by growing global commodity and food prices. The major driver was food prices, which grew 10.1 percent and contributed half of the increase, while services and non-food products grew 6.8 percent and 5.5 percent respectively, with roughly equal contributions.

On the back of the brightening economic picture, Fitch Ratings revised its sovereign rating on Kazakhstan to ‘positive’ at the start of 2011, while Standard & Poor’s raised its sovereign rating one notch to ‘BBB’.

Kazakhstan is slightly behind countries such as Russia and China – where growth is expected to slow over the medium term – but in terms of development, it should continue to close the gap on its bigger cousins to the north and east. The medium-term prospects for strong growth are very good. “GDP was up more than we expected in 2010, owing to the recovery in prices for commodities including oil, gold, copper and uranium,” says Jean-Christophe Lermisiaux, head of research at Visor Capital. “And there is no reason to see this changing for the foreseeable future.”

However, he adds that there are disparities between the natural resources sector and other sectors of the economy – in particular the banking sector, which is “still convalescing”.

Energy potential

Oil and gas remain the engine of the economy. Kazakhstan is already among the top 20 oil producers in the world, and production continues to pick up. Close on the horizon is the launch of the first phase of Kashagan Field – the world’s largest offshore oil-and-gas project – which is expected on, or possibly ahead of, schedule in the first half of 2013. The start of production from this field will be a game-hanger, as it will massively boost the country’s production and increase its geopolitical standing.

However, the development of the extractive industries is shifting from simply lifting production levels to expanding distribution, increasing efficiency and adding more value. The major event in the oil-and-gas industry in recent years has been the opening of the Central Asia-China gas pipeline and new oil pipelines linking oilfields from western Kazakhstan to China. Arguably, building pipelines to new markets has a bigger impact on the economy than finding new and bigger fields – Kazakhstan’s eastern neighbor remains the primary market for its raw materials.

As well as underpinning global demand for commodities, China accounts for 30 to 40 percent of Kazakhstan’s exports. Construction of the Western Europe-Western China highway, and the planned rail link from Zhetigen near Almaty to the Chinese border, will allow Kazakhstan to further increase its exports.

The strong performance of the natural resources sector in 2010 has not been matched by an expansion across the board, and the country is unlikely to see the kind of consumer boom that it enjoyed in the run-up to the global economic crisis – especially in the real-estate sector.

Banks have remained cautious when making loan decisions, and clearing the backlog of unfinished real-estate projects is only now nearing completion. The collapse of the property market was painful and hit the financial sector hard, as it was heavily exposed to this market. However, helped by government funds allocated through the anti-crisis program, most of the lost ground has been recovered. As the sector slowly returns to health, property developers are likely to start considering the first post-crisis projects in 2011.

“2010 was a transition year for Kazakhstan; 2011 will be the year of big decisions,” says Lermisiaux.

SOURCE: Invest In Kazakhstan 2011, p. 25-26

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