Kazakhstan Chamber of Commerce in the USA

KazCham


Light at the end of the tunnel

Posted on March 06, 2010 by KazCham

Kazakhstan is heading for economic recovery nearly two years after the country’s heavily indebted banks became the first foreign victims of the global financial crisis, which began in the US. Economic growth fell from near double digits to around zero by the end of 2008 as commodity prices nosedived. The collapse in global prices for oil, copper and other export commodities reifoced the effects of the original banking crisis, which had sent shock waves through the construction and related industries as banks recalled loans and scrambled to repay maturing foreign debt.

Nearly two years after the onset of the banking crisis, the fate of two of the largest six banks – BTA and Alliance Bank – still hangs in the balance. Creditors face heavy losses from tough restructuring terms designed to keep the banks alive without saddling the state with heavy bailout costs. This is bad news for investors in Kazakh bank debt. But, paradoxical as it may seem, the hard line now being taken by the National Bank with the foreign banks and institutions which lent so freely to Kazakh banks in the boom times reflects a growing sense that the Kazakh economy has already come through the worst.

When the Kazakh tenge was devalued 18 per cent against the US dollar in February, foreign exchange markets factored in further weakening, which newly re-appointed National Bank President Grigori Marchenko insisted would not happen. Since then, oil prices have virtually doubled to more than $60 a barrel, copper prices have risen 60 per cent to more than $5,000 a tonne, and whatever the shape of the expected global recovery, Kazakhstan, with its rich resource base ,strategic position between China, Europe and the Middle East and rising investment in basic infrastructure will be one of the principle gainers. The next movement in the tenge is more likely to be up than down.

Commodity prices are not the only factor affecting confidence. A spate of top-level personnel shuffles and the arrest of senior officials in Kazatomprom, the state-owned nuclear mining and engineering corporation, on theft and corruption charges which many see as controversial, have unsettled both domestic and foreign investors.

President Nazarbayev, who presided over Kazakhstan’s seamless 1991 transition from Soviet Republic to sovereign state, is 68 years old, still active and vigorous. The next presidential elections are not scheduled to take place until 2012. But the last decade of rapid economic growth and the emergence of a new middle class is reflected in the maneuvering of the rising generation preparing to take greater power and responsibility in the years ahead.

The economic crisis of the last two years has inevitably impacted on this on-going transition process. The tensions are reflected in part by the recent concentration of economic power in the hands of Samruk/Kazyna, which doubles as a de facto sovereign wealth fund and industrial holding company. Samruk, which is headed by Kairat Kelimbetov, former head of the Presidential  Administration, was originally set up to inject modern, market-oriented management methods into the state sector of the economy.

It controls the ‘commanding heights’ of the economic system – Temir Zholy, the state railways; Kegoc, the national power grid; KazMunaiGaz, the state oil and gas corporation; KazkhTelecom, the main telecoms provider; and Air Astana, the national airline. This year it added to this ‘traditional’ portfolio by becoming the main shareholder in BTA Bank, a major shareholder in both Halyk and Kazkommertz Bank, and also took over the former direct state holding in Kazatomprom.

This concentration of ownership reflects the President’s choice of Samruk as the main instrument for carrying out the rigorous anti-crisis policy unveiled in February. Faced with a drying up of foreign bank finance, the government decided to deploy the billions of dollars prudently stashed away in the Norwegian-style National (Oil) Fund and central bank reserves during the boom years. Oil revenues were scrupulously separated from the budget and invested conservatively abroad under the watchful eye of the central bank and the Ministry of Finance.

Some $10 billion of these ‘rainy day funds’ of around $47 billion were transferred to Samruk in February in order to recapitalize the main banks and channel fund into selected support for the construction industry, finance for small and medium enterprises and agriculture.

At the same time, however, President Nazarbayev came back from a recent state visit to China with a $10 billion package of financial assistance, including a $5 billion investment by the Chinese state oil company in a joint venture with KazMunaiGaz. This financial boost from China was followed shortly afterward by a $5 billion investment and financing package from South Korean banks and enterprises. This shift in emphasis towards closer ties with Asia is a part of a global re-positioning in economic power away from the traditional sources of capital and technology in Europe and the US towards China and other dynamic financial surplus countries in Asia.

Two years ago, just before the boom collapsed, South Korea’s Kookmin Bank paid a total of $1 billion for contral of BankCenterCredit (BCC), while Italy’s Unicredit paid $2.3 billion for ATF Bank. Both new foreign owners have since injected further capital into their Kazakh acquisitions,  which both  see as potentially profitable investments in Kazakhstan’s long-term future. International investment banks have also been quietly building positions in the country with JP Morgan, Deutsche Bank and UBS prominent amongst recent arrivals keen to potion themselves for Kazakhstan’s expected emergence as a regional financial hub by the middle of the next decade – a prospect also attracting banks from Russia, Asia and the Middle East.

This quiet positioning of long-term investors contrasts with all the superficial signs of an economy in temporary crisis – idle cranes on early-stage construction sites, a steep fall in formerly boated property prices, a collapse in car sales, rising unemployment, falling inflation – which have imposed real pain on many families and individuals. The statistics indicate negative growth in the first quarter of 2009 and only optimists think 2009 will produce 1-2 per cent GDP growth overall – and that hinges on a global recovery in demand for the commodities, which make up more than 80 per cent of the country’s exports.

But 2010 and beyond should be a different story. Next year Kazakhstan’s international profile will rise as it becomes the first post-Soviet state to chair the Organization for Security and Co-Operation in Europe, which was set up to promote democratic development and economic and political co-operation between countries formerly divided by the Cold War. At the same time, China, Kazakhstan’s populous, resource- and energy-hungry but capital-rich neighbor, should be back on its long-term path of rapid economic development, and taking advantage of new pipelines and road and rail links connecting China and Kazakhstan and other Central Asian resources.

This reflects the key fact that throughout this tough recession the big international oil companies have continued to invest billions of dollars in world-size oil and gas fields in the west of the country, such as Karachaganak, Tengiz and Kashagan, while China has pushed ahead with a 3,000 km gas pipeline to carry Turkmen and Uzbek gas through southern kazakhstan to western China. At the end of 2012 the offshore Kashagan oil field is scheduled to come on stream and oil production and revenues will virtually double as production builds up to 1.5 million barrels a day from the new field.

Kazakh gas will also flow east to China when the new export line reaches full capacity of 30 billion cubic meters over the next few years, while construction companies are also building new oil and gas pipelines south and west to Europe via Azerbaijan, Georgia and Turkey. At the same time, Kazakhstan is poised to become the world’s largest miner and exporter of uranium for nuclear power stations as Kazatomprom powers ahead with operative investments with foreign companies in nes mines and processing plants.

With finance from China as well as the World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and others, Kazakhstan is also gearing up to build a new motorway linking China and Europe. Heavy investment  in new rail links, powerful diesel locomotives from a GE locomotive plant in Astana and new oil and gas export facilities at the ports of Aktau and Kuryk are transforming the basic economic infrastructure and preparing for decades of future growth. The last two years have been tough, but the have not been wasted.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 18-20

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