Kazakhstan: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|B||The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.|
Growth curbed by the oil price collapse
Activity, which slowed sharply in 2015, is expected to remain very weak in 2016. Industrial output, dominated by the oil sector, has hardly grown. The start of operations at the offshore Kashagan oilfield is still being hit by severe delays and may not happen before the end of 2016. The start of production may allow a speed up of growth from 2017.
Major investment projects, especially work on the EXPO-2017 international exhibition are expected to sustain activity in construction and services. Consumption, the main growth driver, will be limited (as will investment) by the squeeze on credit as well as by rising prices. Exports are likely to suffer from the economic slowdown in China and the recession in Russia, but primarily from the weak oil price.
Inflation, fueled by the effect of the tenge depreciation against the dollar and the lift of price controls on certain foodstuffs, could exceed the upper limit of the target range (6-8%) set by the central bank (NBK). Price upward pressure may lower during the second half of the year thanks to relatively cheap global commodity and food prices, the strengthening of the tenge exchange rate and relatively weak domestic demand. Then, the central bank is expected to keep on easing its monetary policy started early 2016 (key rate cut to 13% in July).
Budget and current account deficits which appeared in 2015 unlikely to narrow in 2016
Budgetary receipts, over half of which derive from the oil sector, are likely to be affected by only marginal growth in hydrocarbon production and low oil prices. The depreciation of the currency could, however, offset the drop in oil revenue in dollar terms as it is denominated in tenge in the budget. Non-oil tax receipts will increase slightly. Public sector wage rises, initially planned for 2015, have been announced for 2016. The infrastructure projects, moreover, are likely to be maintained. However, this spending is likely to be financed mostly by the oil fund (NFRK) and pensions funds, limiting its impact on the budget, although the State is expected to continue to support indebted public companies (in particular the national energy company, KazMunayGas).
Oil exports (75% of total) are unlikely to increase, given the production difficulties and low oil prices. Demand is also expected to remain sluggish on Kazakhstan's main markets: the EU, China and Russia. Imports are expected to be constrained by a low internal demand. .
After the NBK decided to introduce a floating exchange rate system in August 2015, the currency has weakened and lost almost 50% against the dollar during 2015. The strengthening observed early 2016 due to stabilizing oil price and strengthening in the Russian ruble (leading non-hydrocarbon export market), but the volatility of the exchange rate may remain high .
The country remains exposed to external shocks, with most bank and corporate debt denominated in foreign exchange. However, foreign exchange reserve levels (5 months of imports, excluding gold) and the assets of the NFRK (USD 65 billion in June 2016, i. e. about 1/3 of GDP) mean there is some leeway in liquidity terms.
The banking sector is very weakened by the impact of the depreciation on bank debt and the worsening quality of the portfolio. The weight of deposit (more than half) and loans (around 30%) denominated in foreign currency is a source of vulnerability of the sector.
The issue of President Nazarbayev's succession remains a source of uncertainty
Since 1991, the country has been led by Nursulatan Nazarbayev and his party (Nur Otan), which holds a big majority of seats in the Assembly. Nursulatan Nazarbayev was re-elected for a fifth term in April 2015 with 98% of the votes cast. In the absence of real opposition, president’s party also won with a comfortable majority (above 80% of votes) early Parliamentary elections of March 2016 (initially scheduled in 2017). There is still uncertainty as to the country's political stability due to the risk of conflict which could break out between the different government factions, if the president's (74 years-old) succession had to be rushed in the event of his being unable to remain in power.
There is growing popular discontent over low wages, rising prices and corruption. Protests were organized in May 2016 against a land reform project intended to encourage land leasing by foreigners. Furthermore, a series of clashes have broken out in Aktobe, in northern Kazakhstan after and alleged terrorist attack. Mass protests are, however, still unlikely especially since the security measures, tightened in response to fears of terrorism and religious extremism, limit the opportunities for large-scale protests.
Despite real progress, the business climate is greatly hampered by State interference in the economy, ineffective institutions and corruption.