REVIEW

Quiet Achiever

Kazakhstan’s vast potential matches its size. The task ahead is to encourage development in the country, and leverage its central geographic location between East and West.

Spread across a territory larger than Western Europe, Kazakhstan is the biggest country in Central Asia and the second biggest in the former Soviet Union after Russia. The economic potential of the country is akin to its size; Kazakhstan is home to enormous fossil fuel reserves and ample supplies of metals and minerals, and the country’s industrial sector rests on the extraction and processing of these natural resources. Additionally, Kazakhstan possesses a large agricultural sector with huge wheat and untapped livestock potential. It stands out as one of the top producers of grain in the world. Real estate and construction has also been a driving sector of the economy, as the young Central Asian republic experienced a construction spree to meet the progressive country’s commercial, residential, and infrastructure needs. Matured by the recent global financial crisis, the restructured banking sector is now more resilient to shocks and provides the faster-than-expected recovering economy with the necessary funds for ongoing and future projects.

To realize the full potential of the above-mentioned sectors and spread economic growth to a broader base, Kazakhstan is implementing ambitious development plans. Moreover, incomes have increased in the wake of the global economic crisis and official data suggests that the labor market is tightening.

GDP

Fueled by the start of oil production, Kazakhstan enjoyed high levels of growth over the 2000-07 period, which was also enhanced by economic reforms and increased levels of FDI. The dependence of the economy on the extractive industries had adverse effects as commodity prices, especially oil and gas, declined to historical lows in 2008 and the credit crunch spread across the region. Reflecting its true potential, Kazakhstan’s economy has recovered quickly, growing by 7% in 2010 compared to about 1% in 2009. In this period, extractive industries and a few related sectors, such as transportation and communications, acted as the main drivers of economic recovery. On the other hand, growth in construction, real estate, and investment has been relatively quieter. In terms of numbers, the Kazakhstan’s nominal GDP was measured at $135.2 billion in 2008, before the crisis, by the IMF, before dropping to $113.6 billion in 2009. GDP quickly rebounded in 2010 to $139.9 billion, above the pre-crisis figure, and is on target to hit $169 billion in 2011, with $188.5 billion estimated for 2012, demonstrating the fast path of growth the country is experiencing.

MONETARY POLICY

Monetary policy in Kazakhstan has been aimed at providing price stability. In charge of monetary policy and acting as the key regulator of the financial markets, the National Bank of Kazakhstan gives special attention to the stability of the financial system. It has played a central role in supporting the banking system throughout the global financial crisis.

Rebounding global oil prices have contributed to the increase of foreign exchange inflows, creating appreciation pressure on the national currency, the tenge. Hence, the National Bank has been intervening to maintain the relative stability of the national currency.

The baseline scenario of monetary policy does not expect any growth in bank lending in 2011, and the central bank expects inflation to stay within a 6%-8% range in 2011. The overall level of bank lending, which decreased 2% in the past year, is expected to recover slightly in 2012 and 2013.

INFLATION

Kazakhstan has been implementing rigorous monetary policy to keep inflation under control following hyperinflation in the first years of independence and most recently during the 2007-2008 crisis, which was primarily driven by the global food shock. The pressure on headline inflation, which had passed the 6-8% objective range by January 2011, continues not only due to the continuing food shock, but also due to price increases in other major commodities. The IMF noted that in April 2011 the annual headline inflation rate increased to about 8.5% for the fourth consecutive month.

Although the impact of the global food shock appears less pronounced, the increase in domestic food prices is still the main driver of the surge in inflation as the domestic market adjusts quickly to the upward trend in global food prices. While domestic food prices grew by about 5% in July 2010, the increase in April 2011 was 13.5%. During the second half of 2010, domestic food inflation averaged at 10.5%, about 3% more than the average headline inflation rate for the same period.

As the economic recovery spills over into non-prime sectors of the economy, the base of price pressures is also broadening. There are several additional risks to inflation posed by increases in public wages and pensions, and the upcoming Customs Union tariff harmonization in transportation, utilities, and services. Hence, as the volatility of food and commodity prices, including oil prices, continues, non-food and service sector inflation growth is expected.

TRADE

Since independence Kazakhstan has become more open to international trade. Although Kazakhstan’s trade levels contracted during the 2008-2009 global economic downturn, they are now gradually recovering, and approaching pre-crisis levels. Trade openness—the ratio of total trade in goods and services to GDP—has remained between 90% and 100% for most of the last decade.

Kazakhstan’s emergence as a major oil producer and net exporter boosted its level of trade openness in the 2000s. Since its beginnings in 2000, oil became one of the biggest export items, alongside gas, metals, and several other commodities. In value terms, exports of oil increased from 43% of total exports in 2002 to 57% in 2010.

Russia, the EU, and China remain the key trading partners for Kazakhstan. Yet, the relative share of trade partners in the country’s trade flows has undergone significant changes in the last decade. While China and the EU have rapidly gained importance as trading partners, Russia’s share has declined.

Kazakhstan also pays importance to enhancing regional trade through multilateral initiatives. In addition to the recently enacted Customs Union, Kazakhstan also participates in the Central Asian Regional Economic Cooperation Program (CAREC). In the context of CAREC’s trade facilitation program, Kazakhstan has been taking steps to improve institutional quality in the trade area. Progress has been achieved in the simplification of customs procedures, customs modernization, and customs data exchange with neighboring countries. Kazakhstan also has ongoing pilot programs on Joint Customs Control with China and Kyrgyzstan. Furthermore, not only have trade tariffs been reduced and simplified, Kazakhstan is working on eliminating non-tariff barriers, which is a part of the country’s agenda to enter the World Trade Organization (WTO) by 2012.

In 2010 strong commodity prices were the main driver of Kazakhstani exports. Tighter supply of agricultural commodities and increasing demand from large emerging markets resulted in robust gains. Furthermore, surging demand in China and the recovery in world manufacturing activity propped up the export of other commodities, especially oil and base metals.

At the same time, imports continued to decline, falling by about 13% between January and November 2009. This can be mostly attributed to weaker demand for capital goods. For example, imports of oil and gas line pipes fell by 70% as domestic investments into transportation infrastructure declined by over a quarter following the completion of major pipelines a year ago. In 2010, imports of machinery and equipment declined by 7%. Tight consumer lending in the post-crisis banking sector and a weaker currency reduced durable goods imports. For example, passenger vehicle imports dropped by nearly 80%.

BUSINESS CLIMATE & FDI

The country is committed to regional and international cooperation and aims to become one of the top 50 most competitive economies in the world. Kazakhstan ranks 59 in the World Bank’s Doing Business report for 2011. The report noted that the most significant progress was achieved in such areas as improved conditions for starting a business (up 38 places), paying taxes (up 14 places), investor protection (up 13 places), and dealing with construction permits (up 9 places). FDI inflows into the country showcase Kazakhstan’s investment-friendly business climate. An attractive location for FDI, the country has generated over $120 billion through FDI since 1993. This is the highest level of FDI in the CIS after the Russian Federation, and looks set to continue.