Kazakhstan: Risk Assessment

Country Rating¹

Rating: B

Business Climate Rating¹

Rating: B

Risk Assessment²

Dominant oil sector
In 2010, rising raw materials prices and the government's continuing recovery plan fuelled a rebound in the Kazakh economy. Industries and services relating to hydrocarbons and minerals (mining and prospecting, but also transport, communications, etc.) posted healthy results, whereas the construction and property sectors continued to contract, and agricultural production fell due to the drought. In 2011, the economy will remain sensitive to changes in oil prices and, to a certain extent, minerals prices. Slowing foreign demand and the ending of some recovery plan measures, along with less favourable base effects, are nevertheless expected to lead to a slight drop in the growth rate. In addition, despite the recovery of the labour market, domestic consumption will continue to be penalised by the lack of credit available to households. Domestic demand will thus mainly be driven by public sector investment, while private companies remain highly undebted. Low credit availability and weak domestic demand are expected to lead to a drop in inflation. Any sharp oil price hike would nonetheless revive inflationist pressure.

Banking sector still weak
The banking sector seems to be stabilising, but still represents a major source of risk for the economy. The sector continued to deleverage in 2010, and the three banks that defaulted in 2009 (BTA, Alliance Bank and Temir Bank) have concluded an external debt restructuring agreement with their creditors. Nevertheless, of the massive non-performing loans are posing a threat to the capitalisation of some banks. They have consequently cut back on lending, which erodes corporate solvency. Private sector defaults thus cannot be ruled out, particularly in non-oil sectors where corporate debt is high. Sufficient State resources nevertheless should avoid another vicious circle of credit crunch, and implement a mechanism to resolve the problem posed by non-performing loans. Kazakhstan's national oil fund reserves have indeed returned to pre-recession levels, and the government has secured official financing from China and a number of international organisations.

Political stability
President N. Nazarbaïev's 2012 re-election bid has diminished short-term risks relating to his succession. Seen as the artisan of the country's strong economic growth over recent years, he remains a popular leader, having significantly increased social spending during the recession. He is likely to be re-elected. The policy of opening up to foreign investors will thus continue, even though State involvement in the economy may have an adverse effect on the business environment. On the external front, although Kazakhstan maintains good relations with the West and China, it has also strengthened its partnership with Russia via the implementation of a tripartite free trade zone also including Belarus. Some Kazakh companies may, however, suffer from a lack of competitiveness compared to their Russian counterparts.

Strengths

• Very abundant natural resources (oil, gas, uranium, iron)
• Increase of oil exports thanks to exploitation of the Kashagan field and construction of new pipelines financed by foreign investors
• Strategic position between Asia and Europe
• Customs union with Russia and Belarus
• Evenhanded policy with respect to ethnic minorities
• Plentiful FDIs

Weaknesses

• High weaknesses of a banking sector burdened with very heavy foreign debt
• High demand for oil fund reserves
• Uncertainties over President Noursoultan Nazarbaiev’s ultimate succession
• Persistent deficiencies in the legal and institutional framework
• Excessive private sector undebtedness