Kazakhstan 2015 | ECONOMY | REVIEW: ECONOMY

While President Nazarbayev has warned of hard times ahead, a closer look at the country's strong regional position and ability to attract investment shows that the fundamentals of the economy are strong and the smart money is still on long-term growth.

The defining characteristic of Kazakhstan's economy in 2014 and early 2015 has been dogged growth in the face of adversity. That the country's GDP grew by 4.3% in 2014 speaks to its ability to thrive in spite of a dramatic decrease in oil prices, and the devaluation of the tenge—with the specter of another devaluation around the corner. President Nazarbayev expressed it best when he warned that, “Hard times are coming. You all hear and see it. The crisis and sanctions in world politics increase the risks for the global economy. Prices for hydrocarbons and metals and other products are falling. It will be difficult for us, because we are part of the global economy." In spite of these circumstances, the president assured the populace that until conditions improved, the government would stand by investors and the people, and that the global downturn would “not affect [the government's] social expenses." He then instructed the government to “ensure the fulfillment of all obligations of the government to the people."

On the other hand, the crisis could actually play out in Kazakhstan's favor in some ways. The country is not directly involved in the struggle over Ukraine, and with the subsequent sanctions and counter-sanctions escalating, it has full access to the Russian market as a member of both the Eurasian Economic Community (EEC) and the Customs Union. At the same time, it has strong trade ties and relations with Europe. In other words, as Kazakhstan works towards WTO membership, and steadily builds its international ties, it emerges as a conduit and intermediary in a region where few other options exist—a politically viable jump off into Russia and other CIS countries and vice versa. With each new investment in transportation and logistics, this advantage grows. And with Russia turning into a dicey investment for many western firms, Kazakhstan is often the logical alternative.

A TBY business confidence survey of Kazakhstan-based firms substantiated this notion, especially in the transportation and export sectors. While firms acknowledge that demand is on its way down in some areas, their ability to mitigate this downturn by increasing the scope of their operations should play out in their favor. EEU membership is a major factor. The result is a sense of cautious optimism, tampered by wariness about currency devaluations.

While "economic doldrums" may be an overstatement, there is widespread agreement that radical steps are required to reinvigorate the national economy, and bolster defenses against economic unrest. President Nazarbayev has opted for the Keynesian route, with bold plans for an updated version of Roosevelt's New Deal program. Unveiled in late 2014, the Nurly Zhol (Bright Path) strategy features an additional $9 billion in public spending—with the funds coming directly from the country's rainy-day oil fund. The $9 billion injection, doled out at a rate of $3 billion annually from 2015 to 2017, amounts to 12% of the fund's $76.8 billion hard currency holdings. In addition to this emergency infusion, the fund is used to cover a portion of the government's annual operating expenses, with $9.4 billion earmarked for each year between 2015-17. Combined, the total fund expenditure for the three-year period could reach $37.2 billion.

With a committed fiscal approach, and economic growth that, at its nadir, is still enviable in many developed countries—the UK registered 1.7% and Franc 0.2% in 2013—Kazakhstan's economy continues to develop in line with the government's 2050 development strategy. With a GNI per capita of $11,380, the country is ranked as upper middle income. Moreover, the World Bank's Doing Business report ranked Kazakhstan as 77th for 2015, down by one point from 2014's 76th place. In other words, after a decade of strong FDI inflows, and a stable investment climate, Kazakhstan is well positioned to ride out the storm.

International credit rating agencies have come around to Kazakhstan as a sound investment as well, however a perfect storm of factors—most beyond the control of Kazakhstan—finally forced them to lower their ratings in mid-2014. Standard & Poor's rating for the country was BBB+ and Fitch gave a BBB rating as the economic climate in the region soured. Nonetheless, the country's credit rating tier falls well within the investment grade spectrum. These ratings simply indicate that Kazakhstan has adequate capacity to meet its financial commitments, but that impending economic conditions may strain this capability. This is not news to investors, and President Nazarbayev has been consistently candid about the future. The devaluation of the tenge certainly factored into these decisions, however a rebound in exports will some way in offsetting the damage. Kazakhstan devalued its currency by 19% in February 2014 to make its exports more competitive and boost economic growth to a 6% target for the year, according to President Nazarbayev. While ultimately the target was off by 1.7%, the policy did mitigate what could have been a much larger slide in economic activity.

The most recent business climate ratings are also working in Kazakhstan's favor. Doing Business ranked Kazakhstan 77th and the World Economic Forum (WEF) gave the country a 4.42 score which landed it 50th overall in its Global Competitiveness Index Ratings. The WEF substantiated its choice with a battery of statistics that showed the country's merit. For example, Kazakhstan came in ninth for government budget balance as a percent of GDP, 16th in pay and productivity, 20th in strength of investor protection, and 25th in the ratio of women to men in the labor force. In other words, in many regards Kazakhstan is already in the top-30 group that it has set as a goal for 2050.

In terms of labor market efficiency, Kazakhstan earned a score of 4.9 from the WEF, placing it 15th, ahead of advanced countries such as the Netherlands and Japan, and far ahead of it's EEU partner Russia, which comes in 45th place. Kazakhstan also earned a value of 4.7 in pay and productivity earning it a ranking of 16th out of 144. These impressive statistics demonstrate the potential of Kazakhstan for returns on investment.

Another advantage of this strategy for encouraging economic growth—in a large part through investment—has been the introduction of taxation levels that are meaningfully less than those of other major economic players in the region. Immediately to the east, China has a 25% corporate income tax (CIT), as opposed to Kazakhstan's 20% CIT rate. For VAT, Kazakhstan's rate beats both China and Russia by 30% and 33% respectively. For priority investment projects, Kazakhstan's 0% CIT rate is double digits, below both Russia and China, a move that has played a part in attracting companies that service these two large markets to the north and east.

While oil revenues allow the state to relax its taxation schemes in such a way that less resource-rich countries are unable to, the ripple effect of FDI in the economy is expected to raise development through the private sector, and allow the government to concentrate on its core activities. The share of the economy controlled by 'quasi-state' or state-affiliated firms ranges from 40-60%, depending on estimates. However, through privatization initiatives such as the People's IPO, and the encouragement of private-sector competition, the government is working to reduce this rate to those of other developed countries.

The results have been impressive. FDI shot up between 2005 and 2012, when it peaked at $28.9 billion. By 2013, it was down to $24 billion, and for 1H2014, the total was $12.4 billion indicating that FDI for 2014 would be close to, or slightly higher than in 2013—still high by all accounts. Another subset of FDI worth closer attention is FDI in manufacturing which peaked in 2011 at $5.7 billion. Bearing in mind that the total population of Kazakhstan is just over 17 million, and that total FDI in manufacturing alone since 2010 has been over $15.4 billion, investments of this size must be taking other markets into account. In other words, investors see Kazakhstan as a stable base from which to target other Central Asian and regional markets.

Digging deeper, FDI over the past decade has landed in numerous sectors, but the biggest beneficiaries have been professional, scientific, and technical activities (which include energy sector operations and engineering) and mining and quarrying, which brought in $70.666 billion and $46.73 billion respectively and together equaled over 63% of FDI between 2005 and 2013. Manufacturing also came in strong, with $20.2 billion or 11% of FDI for the same time period. This manufacturing FDI in turn falls to two major beneficiaries, with metallurgy and the manufacturing of fabricated metal products taking the lion's share of 79.3% or $16 billion. The production of foodstuffs, beverages, and tobacco products came in a distant second with $1.46 billion or 7.2% of manufacturing FDI.

Economic strategists in Kazakhstan aren't the only ones who are tax conscious. The British Virgin Islands are, by a wide margin, the largest source of FDI, with investments totaling $51.6 billion, or just over 28% of total FDI. Other major investors are Italy, China, and Switzerland. That said, the diversity of destinations for FDI into Kazakhstan speaks to a wide spectrum of interest, which should stand the country in good stead when regional crises knock out geographically-specific FDI for a period. For example, quantitative easing in the EU could offset a decrease from other areas where capital for investment is temporarily scarce.

Looking to the future, the IMF predicts relatively strong GDP growth well into 2016—with an average of 4.7% between 2014 and 2016. For that same time period, gross national savings are expected to run an average of just shy of 30%. In 2016, the IMF predicts that total investment will reach 30.5% of the GDP, while inflation will remain stable at 6% and unemployment will remain low at 5.2%. In short, whatever short-term economic tribulations might be in Kazakhstan's future, the fundamentals of the economy are strong and the smart money is still on long-term growth.