Kazakhstan 2014 | ECONOMY | REVIEW: ECONOMY

The country's growth story continued in 2013, although delays in hydrocarbon sector development may slow the rapid progress in the short term.

Another year, another impressive growth figure—Kazakhstan's 6% GDP growth for 2013, according to the World Bank, is indicative of the nation being a center of attraction in the region. Despite a worldwide withdrawal from emerging markets, instability in Russia's ruble, and concerns over US Federal Reserve tapering, rising domestic demand, increased hydrocarbon output, and recovered agricultural production helped to keep the train rolling. It hasn't all been rosy in 1H2014, however, with external pressures forcing a 18.9% devaluation of the tenge in February, leading to fears of a spike in inflation—the Asian Development Bank (ADB) predicts inflation at 11.5% by YE2014, before recovering to 8.8% in 2015. Elsewhere, in April, the coming online of the Kashagan oil field—a massive $50 billion investment project undertaken by a consortium including ExxonMobil, Royal Dutch Shell, Total, Eni, and CNPC—was delayed until late 2015 or early 2016 as 200 kilometers of pipeline is replaced due to the detection of cracks. It is estimated that the setback will represent a 0.5 percentage point loss in GDP for 2014, and mean that the government will have to wait for the increased revenues Kashagan was set to bring to its coffers.

And the long-term role of the country's hydrocarbon resources cannot be underestimated; the oil and gas sector's contribution to GDP has risen from 10.9% in 2001 to 25.2% in 2012, according to Ernst & Young (EY), and represents approximately 80% of exports.

The World Bank estimated that per capita GDP was almost $13,000 in 2013, and the institution cited an expansion of credit as the key driver behind private consumption (up 16.1% in 2013) and private investment (up 12%) over the year, more than making up for a slowdown in public consumption (up just 1.6% as a result of fiscal tightening) and public investment (down 10%). The poverty level also dropped to 3.8% in 2012 from 5.5% in 2011, according to the country's own estimates, a big improvement over 2001 when the figure was estimated at 47%.

While projections of increased oil output as the Kashagan project moves toward its endgame offer up the prospect of Gulf-style oil wealth generation—Kashagan is the world's fifth-largest reserve and the most significant outside the Middle East according to the US Department of Energy—the reality will be an increasing exposure to external risks should the economy not diversify fast enough. In that vein, the government is pulling out all the stops to encourage growth across a multitude of sectors. In February, President Nazarbayev ordered $5.5 billion from the National Fund—a kitty said to include more than $70 billion, or approximately 70% of total international reserves—to be channeled into the economy, while a significant deal with the ADB is set to see $1.3 billion added to that figure along with advisory support. The cash is earmarked to support industrial development, SMEs, and the financial services sector. In another significant development, Kazakhstan became a donor to the ADB in 2013, after 20 years of drawing loans. Elsewhere, industry expanded by 2.3% in 2013 according to the ADB, while mining output rose by 3.1%. Improved harvests for the year put the agriculture sector back on track, up 10.8% after an 18.5% decline in 2012. Preliminary data from the ADB also points to slowed growth in the services sector, down to 7.4% from 10.4% in 2012.

In terms of trade, Kazakhstan posted a narrowed surplus in 2013 at $33.6 billion, 29.7% down on the previous year, according to the national Statistics Agency. Foreign trade turnover dropped by 1.1% to $131.4 billion, with exports down 4.6% to $82.5 billion and imports up 5.4% to $48.9 billion. The Customs Union, including fellow members Russia and Belarus, represented $5.86 billion of total exports in 2013, down 5.9% in 2012, while imports from the countries were up 9.5% to $18.37 billion. Although significant, the Customs Union is far from the largest export destination, with that honor going to Italy (18.4%), China (17.4%), and the Netherlands (11.8%). The largest source of goods imported to Kazakhstan in 2013 were Russia (36.2%), China (16.8%), Germany (5.7%), and Ukraine (4.6%). In terms of the future, two major developments sit on the horizon for the country's trade. One is the gradual transformation of the Customs Union into the Eurasian Economic Union, with Kyrgyzstan, Tajikistan, and Armenia possible candidates for membership, while the other is Kazakhstan's long-delayed accession to the World Trade Organization (WTO). Expected in the upcoming years, questions remained in 2013 over a number of technical issues.

A much-improved business environment, however, has ingratiated Kazakhstan with investors over recent years, with $160 billion in FDI having being attracted since 1993, and current figures suggesting that the country is the destination for 80% of all FDI inflows to the Central Asia region. Kazakhstan has emerged as the second most attractive destination for investors in the region after Russia, with the hydrocarbon and mining sectors being big draws. According to EY, itself sourcing figures from the National Bank of Kazakhstan released in 2013 based on a new methodology, Kazakhstan drew in $27 billion in FDI in 2012, 25% of which went to geology and exploration works, 21% to oil and gas production, and 7% to the mining industry. The overall figure has grown consistently YoY since 1998.

The ADB now predicts the economy growing by 6% in 2014 and 6.4% in 2015 following the 18.9% devaluation of the tenge in February. It also forecasts industry expanding by 2.9% in 2014 and 4% in 2015 as mining revives and the fruits of an ambitious industrialization program ripen. As the country begins to count down to World Expo 2017, the construction sector is set for a boost—the ADB predicts public consumption to increase to 4% in 2014 and public investment to grow by 6.8%, resulting in growth of 3% to 4% in the construction industry—while agriculture growth is expected to grow at 4% in 2014 and 4.4% in 2015, on the back of the Agribusiness 2020 program, a plan aimed at diversifying the sector beyond grain production. Meanwhile, services are set to expand by 8%, a result of the country's improving transport connectivity and business services, while private consumption growth will fall to just under 7% in 2014 as a result of restrictions on consumer credit, tax pressure, and tenge devaluation, an occurrence the ADB expects to begin correcting itself in 2015 when consumption growth will recover to 7.5%. On the trade front, a devalued currency should slow imports, while boosting mineral imports and leading to a rise in overall exports of 4% in 2014 and 4.5% in 2015.