Kazakhstan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant oil, gas, and mining potential
- State enjoys net creditor position and has a well-endowed sovereign wealth fund thanks to hydrocarbon production
- Abundant FDI
- Floating exchange rate
- Member of the Eurasian Economic Union (EAEU) and China's Belt and Road Initiative (BRI)
- Strategically located between Europe, Russia and China
- Heavily dependent on Russia (main partner in diplomacy and security) and China
- Heavily dependent on commodities (oil, gas, uranium, iron, steel, copper); under-diversified economy
- Inadequate road, port, and electrical infrastructure
- Weakly competitive market structures (high concentration in key sectors and significant government presence)
- Fragile banking system and significant dollarization (40% of deposits and 16% of loans)
- Weak governance (corruption, politicization of the court system, deficiencies in collective proceedings)
- Landlocked; low population density; relatively far from global markets; significant non-tariff barriers despite WTO membership
A recovery dependent on the pandemic and hydrocarbons
After plunging into its first recession since 1998, Kazakhstan is expected to return to growth in 2021. Strict lockdown measures from mid-March to mid-May 2020, then again from mid-July to end-August 2020, severely impacted a key source of growth, namely domestic demand, via the services sector (59% of GDP) and private consumption (56.5% of GDP). Lower real wages, rising unemployment (7.8% projected for 2020 according to the IMF) and sluggish consumer confidence caused private consumption to collapse. While the scale of the recovery will depend on the pandemic, the upturn could be driven by mild growth in real wages in 2021 and employment support measures, such as the implementation of the Employment Roadmap adopted in March 2020 and aimed at creating 255,000 jobs by 2021 in infrastructure projects. The recovery could also be fuelled by investment (25% of GDP), benefiting from support measures implemented since March 2020, such as the SME loan subsidy program, which has been extended until March 2021. This momentum will be supplemented by public investment, notably through the development of rural and digital infrastructure with a view to 5G deployment in 2021 and growing integration with China's Belt and Road Initiative.
With an economy dependent on hydrocarbons, which account for two-thirds of exports, the recession worsened in 2020 as oil exports fell in value and volume terms. As an OPEC+ member, Kazakhstan agreed to cut production from April 2020 to April 2022. The recovery in 2021 is expected to be driven by rising demand for oil, higher oil prices, and the easing of restrictions. In 2021, the government plans to produce slightly more than allowed under the restrictions, particularly to respond to increased production capacity. Investments in the Tengiz field expansion (USD 45 billion, or 25% of GDP) are continuing in order to provide a future growth driver. The diversification agenda launched in 2015, which is focused on manufacturing and agri-food, has shown little headway and will be delayed again.
The government has encouraged the central bank to stimulate credit, mainly for households, even at the cost of suspending its inflation target of 4% to 6% for 2021-2022. In fact, the policy rate, which stood at 9% in September 2020, is likely to remain unchanged, in order to contain inflation, which is running high already, stoked by the tenge’s depreciation trend and other factors. Bank restrictions were eased in 2020 and some measures, such as reduced capital requirements, have been extended until mid-2021. While fundamentals have strengthened since the 2015 crisis, which led to mass bailouts, banks remain fragile and asset quality could quickly deteriorate.
Public finances supported by the sovereign wealth fund, but increased risk of capital controls
The support plan (9% of GDP) and the decline in oil revenues (one-third of tax revenues) caused the public deficit to widen in 2020. The deficit is expected to narrow in 2021 as hydrocarbon revenues recover and increase. It will be mainly financed by the sale of assets held by the NFRK sovereign fund, which will keep the public debt-to-GDP ratio low. The potential burden on the public finances represented by banks and state-owned enterprises is not insignificant. With the crisis, the privatization of state-owned enterprises, initially planned for 2016-2020, was pushed back again to 2021-2023.
The current account deficit should not widen significantly. Lower oil exports reduced the trade surplus, but also the primary income deficit, as FDI revenues declined. The deficit may actually fall slightly in 2021 as oil exports rise. It will be largely financed by the assets and reserves of the central bank and NFRK (valued at USD 93 billion at the end-July 2020, or 51% of GDP). Unlike during the 2015 crisis, tenge flexibility protected foreign exchange reserves excluding gold (USD 10.7 billion, 3.1 months of import covered), which will offset the decline in inward FDI flows directed to hydrocarbons. Restrictions on foreign currency withdrawals by companies were implemented in the second half of 2020, and there is a risk of more restrictions or capital controls in 2021.
Consolidation of the presidential succession
In June 2019, Senate President Kassym-Jomart Tokayev unsurprisingly succeeded Nursultan Nazarbayev, who had led the country since 1989. Tokayev has yet to assert his authority but enjoys the political protection of Nazarbayev, who remains a key player as chair of the powerful Security Council and the dominant Nur Otan party. Nazarbayev is relatively old, and his death could trigger a power struggle within the ruling classes. However, the political elite appreciates the increased freedom provided by Tokayev. Conversely, popular confidence is waning. Elections to the lower house of parliament in January 2021 are unlikely to be free or fair, with virtually no opposition, and should deliver another big win for Nur Otan. This could spark protests, as might the economic crisis or China’s economic presence, which is set to increase. Any protests will probably be small and contained, especially since security has been tightened amid fears of terrorism.