Kazakhstan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Increased oil production
- High levels of foreign direct investment
- Net creditor position of the State
- Strategic location between China and Europe
- Increase in working population (67% of the total) thanks to a dynamic demography
- Relatively high level of training
- Economy reliant on commodities (oil, gas, uranium, and iron)
- Fragile banking system
- Continuing legal and institutional failings: corruption, administrative delays and obstacles to trade
- Inadequate road, port, and electrical infrastructures
- Danger of political instability because of lack of clear successor to President Nazarbayev
- Landlocked and low population density, particularly in northern regions
Moderate Growth and Fragility of Banks
The economy is expected to maintain moderate growth in 2018. Investment (25% of GDP) should continue to benefit from the development of public infrastructure, particularly road and rail and possibly as part of the Chinese “One Belt, One Road” initiative, supporting the construction sector. The site of Expo 2017 in Astana is set to be transformed into an international financial center. However, despite the tax incentives and the creation of a stock exchange based on the partial privatization of public companies, it will run into competition from the Almaty exchange and the reluctance of investors faced with institutional limitations. Exports, consisting of 57% oil and 16% metals (steel, iron, copper, uranium), should benefit from the modernization of three refineries, the construction of a nickel plant, and the increased production of the Kashagan oil field. The country is expected to request a revision of its quota of 1.7m barrels per day (b/d) from OPEC. At the same time, imports of capital goods (half of the total) should also increase in connection with infrastructure development, which would ultimately maintain the slightly negative contribution of trade to growth. Household consumption (a little more than half of GDP) would continue to grow moderately due to significant inflation and credit remaining expensive and rare.
Since the abandonment of the pegging of the tenge to the dollar (August 2015) and its floating along with changes in oil prices, the central bank has focused on controlling inflation. Inflation is moderated by the lower expectations of economic agents, as well as the stabilization of import prices related to the stabilization of the tenge. Nevertheless, it should still exceed 6% in 2018. Moreover, despite costly new recapitalizations (5% of GDP) in 2017, the banking system continues to be weakened by the sharp depreciation of the tenge, which occurred while the 2008 crisis had not been completely absorbed. The percentage of non-performing loans – officially 10.7% as of July 2017 – is certainly much higher. In addition, the system is both scattered (33 institutions, often small in size) and concentrated, with one institution holding 37% of deposits. Lastly, while the share of deposits in dollars has dropped from its peak in 2016, it remained at 50% in August 2017. Many institutions are owned by influential personalities who are not easily pushed around in efforts to restore order, and who manage to obtain public funds to avoid liquidation. Given these conditions, interest rates on interbank loans would be close to 13%.
Deficits in Decline and Well-Endowed Sovereign Wealth Fund
Despite the drop in oil revenues (from 50% to 35% of budgetary revenue), the increase in expenditures intended to support activity, the costly bank bailout, and the depreciation of the currency, public debt (half in foreign currencies) remains low. This is due to the use of the sovereign wealth fund. Once assets from this fund are subtracted, the State has a creditor position of 18% of GDP. Aside from a new banking bailout, the deficit is expected to drop significantly in 2018. The sovereign wealth fund, which represents almost two times the debt, even further tapped, would stabilize thanks to the increase in hydrocarbon production. There is room for improvement given the poor tax collection and the numerous exemptions. Such improvements would reduce dependence on oil revenue while increasing capital expenditure.
The current account deficit that emerged in 2015 is expected to decline. The trade surplus would go up with increased hydrocarbon production of the Kashagan, Tengiz, and Karachaganak fields. Subsequently, the start-up of new automobile and nuclear fuel plants to reduce dependency on hydrocarbons will contribute to this. The large growing stock of foreign investment concentrated in hydrocarbons will continue to generate significant revenue outflows. The leasing of the Baikonur Cosmodrome to Russia brings in little revenue. The indebtedness of banks and companies, mostly in foreign currencies, soared with the devaluation of the country’s currency. It has come back down to 100% of GDP and is expected to ease further. In addition, half of the debt corresponds to intra-group commitments related to FDI. Lastly, the amount of the central bank’s foreign exchange reserves (8.6 months of imports, excluding gold) and the foreign assets of the sovereign wealth fund (USD 62 billion in July 2017, or 42% of GDP) give the country a creditor position with regard to the rest of the world.
Uncertain Succession of President Nazarbayev
Nursultan Nazarbayev, who has led the country since 1989, was re-elected for a fifth time in April 2015, with 98% of votes. Without any real opposition, his party (Nur Otan) easily won the parliamentary elections in March 2016 (over 80% of the vote). The constitutional reforms of 2017, increasing the powers of the parliament and the government, remain theoretical. Doubts around political stability within the country continue: if the president (77 years old at the time of writing) were unable to remain in office, the nomination of his successor presents a risk of conflicts between the different factions in power. Mass protests are rare, especially as security measures are reinforced by the fear of terrorism and Islamic fundamentalism.