REVIEW

Funds for the Future

Buoyed by favorable international commodity prices, Kazakhstan’s prudent fiscal policy and encouraging domestic credit recovery are paying dividends across the real economy.

Recording solid economic growth of 7.5% for the second year in a row in 2011, Kazakhstan appears to be enjoying a sustained and largely demand-driven recovery. Besides robust domestic consumption, key drivers included a massive rebound in agricultural output following the drought of 2010, credit recovery in the banking sector, strong global energy prices, and dynamism in the non-oil sectors.

According to the IMF, international rating agencies, and the country’s central bank—all of whom foresee between 5% and 7% GDP growth for 2012—the trend looks set to continue. The World Bank, in particular, predicts that Kazakhstan’s per capita income of $8,200, which is already the highest in the region, will double by 2016, thereby elevating the nation to high-income status.

This rosy outlook is informed by positive forecasts for Kazakhstan’s traditional strengths as well as the emergence of new growth industries. The nation’s economic lynch pin remains oil, representing a quarter of GDP. Projects such as Kashagan, set to come onstream in 2012, in concert with the anticipation of continued global demand, bode well for Kazakhstan’s broader economy. Major transport projects, such as a new rail link to China, promise to further boost trade turnover with the country’s resource-hungry neighbors.

However, the most structurally encouraging indicator is the success of Kazakhstan’s long-term project for the diversification of the
economy, launched in 2004. Strategic sectors such as manufacturing, transport, and ICT all saw solid growth in 2011, and government support for SMEs is helping to create new revenue streams for the domestic product.

ICT is receiving particular emphasis in the form of education initiatives. Leveraging the sector’s advantages of low costs compared to Russia and high broadband penetration compared to the rest of the region, the government hopes to transform robust domestic demand for IT into a global business platform.

This level of dynamism has allowed Kazakhstan to follow a plan of prudent fiscal consolidation while avoiding the pitfalls of austerity. Government capital spending has declined consistently over the last three years, while private investment financed from domestic sources expanded by 12% in 2011, more than offsetting a marginal real decline. Overall, fixed-asset investment was up 2.4% in 2011.

Positive indicators were underscored by an impressive showing in the World Bank’s 2011 Ease of Doing Business report. Kazakhstan jumped 11 places to number 47 worldwide, putting it well above comparable countries such as Russia (120) and the regional average (77). The improvement was lead by a monumental jump in the critical “Protecting Investors” category, in which Kazakhstan moved up 34 spots to number 10 worldwide.

An attractive and efficient tax regime also played an important part in Kazakhstan’s vault up the index. “An assessment of the overall tax rate reveals that Kazakhstan boasts one of the lowest tax rates in the world, ranked 40th, ahead of countries such as the UK, Norway, Russia, Germany, and the US,” Minister of Finance Bolat B. Zhamishev told TBY.

POLICY

Cutting capital spending and saving fiscal surpluses in the National Oil Fund are the hallmarks of Kazahstan’s post-crisis macroeconomic management. In 2011, government spending stood still at 22%, the non-oil fiscal deficit improved, and the consolidated fiscal surplus doubled compared to 2010, to reach an enviable 6.3% of GDP.

According to the central bank, the National Oil Fund hit $51 billion by end-April 2012. One of Kazakhstan’s key fiscal policy levers, the Fund absorbs windfall revenues and helps to hedge the economy against potential oil-price volatility and other external shocks. Fiscal reserves in the fund were 27.6% of GDP by end-2011, putting it well above pre-crisis levels.

Foresighted management of windfall revenues has also benefited Kazakhstan’s external position. The country’s current account surplus grew 4.5 times, equivalent to 7.3% of GDP in 2011, while international reserves rose by 23% to reach $73 billion, or 40% of GDP, by end-2011. In response to a significantly strengthened balance sheet, S&P and Fitch raised the country’s foreign currency sovereign credit rating to BBB+ (stable outlook) and BBB (positive outlook with a country ceiling of BBB+), respectively in 2011. Many analysts expect Moody’s to follow suit in 2012 as rising oil prices result in even larger amounts of fiscal reserves being invested abroad.

Despite the fact that the total stock of external debt rose 10% in 2011, Kazakhstan’s overall net worth grew 17%, largely thanks to the central bank’s efforts to sterilize capital inflows by investing in short-term assets abroad.

In terms of monetary policy, annual inflation lowered from 7.4% at end-2011 to 4.7% in February 2012, allowing the central bank to cut official lending rates by 50 basis points to 7%. The decrease continued to 4.5% in March 2012, its lowest point since pre-transition 1989. Meanwhile the sterilization of foreign currency inflows prevented the appreciation of the tenge, which was switched to a managed float against the US dollar in 2011. Despite the transition from peg to float, a narrow +/-1% band was maintained and nominal exchange rates have remained virtually flat.

Policy response to the financial sector’s non-performing loan (NPL) problem was one of Kazakhstan’s most widely hailed moves of 2011. As of June 2012, the newly created Stressed Asset Fund started to buy bad loans from second-tier banks. The fund operates as a special-purpose vehicle (SPV) meant to buy non-real estate loans at a 50% discount.

Other programs to boost credit include government-subsidized low interest rates, the newly created SME Development Fund, and the comprehensive Road Map for Business, which includes multiple mechanisms to support entrepreneurial development throughout the country, particularly in rural areas.

NPLs still represent 11% of GDP and 32.6% of total loans (with a majority in the construction sector). However, preliminary data shows that credit to the economy increased 15.6% year-on-year in 2011, signaling a domestic credit recovery that may negate the economic impact of overdue assets.

REGIONAL ECONOMIC INTEGRATION

In addition to a careful domestic economic policy, Kazakhstan is pursuing an aggressive strategy of regional economic integration. Central to this plan has been the Eurasian Economic Community (EEC), a customs union put into effect in 2000 between Belarus, Russia, and Kazakhstan. This concept took a leap forward in January 2012 when the three countries agreed upon a roadmap for a common economic space (CES), an initiative conceived of and spearheaded by President Nazerbayev, known as an intense supporter of globalization. According to Russian President Vladimir Putin, a common market is expected to be in place by 2015.

On the back of this agreement, President Putin announced in June 2012 that Russia and Kazakhstan plan to increase mutual trade from $24 billion to $40 billion, as a result of the removal of administrative barriers.

Kazakhstan’s private sector has generally lauded the CES initiative. “Our market has been increased from 16 million people to more than 167 million people,” Fatih Uzunoğlu, CEO of the Kazakhstan-based production company Galaksi Group, told TBY. “If Kazakhstan can move fast to develop the investment climate for foreign investors, it can attract serious direct foreign investment from the companies who want to enter Russian markets.”

Kazakhstan’s accession bid to the World Trade Organization also reflects its overall integration strategy. With the support of new member state Russia, Kazakhstan hopes to join the organization by the end of 2012.

Its neighbors to the east are now playing a role in Kazakhstan’s regional economic strategy as well. In 2011 China replaced Italy as the country’s number one trading partner. Kazakhstan is leveraging its unrivaled access to Xinjiang, a western Chinese region that is transforming into an industrial hub, through the development of transport links. China now accounts for 17.1% of all of Kazakhstani exports.

This growing trade partnership has been accompanied by major Chinese investments in Kazakhstan. The China National Petroleum Corporation, for example, is now the largest corporate investor in the country, accounting for more than $7 billion of inflows.

China isn’t the only East Asian nation investing in Kazakhstan. In 2010 Kazatomprom, the state atomic energy consortium, teamed with Toshiba and Sumitomo of Japan in a rare- earth venture worth $300 million. In 2012, the South Korean Chemical manufacturer LG Chem invested $1.3 billion in the second state of an integrated chemical complex in the Atyrau region of Kazakhstan.

According to the Ministry of Economic Integration, Kazakhstan’s trade turnover was $125 billion in 2011, marking a positive trade balance of $50 billion. FDI was $147 billion. As these figures expand and Kazakhstan increases trade volumes, outlooks for the country’s economy expect positive results for years to come.