Country Risk Rating

D
A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high. - Source: Coface

Business Climate Rating

E
The highest possible risk in terms of business climate. Due to a lack of available financial information and an unpredictable legal system, doing business in this country is extremely difficult.

Strengths

  • 4th largest natural gas reserves in the world, prospects for new customer wins
  • Moderate debt level
  • Healthy public accounts

Weaknesses

  • Small landlocked economy
  • Porosity of the border with Afghanistan, while military resources are limited
  • High dependence of the economy on the hydrocarbon sector (mainly gas) and China, which imports almost all of these fuels
  • State interventionism and governance problems (corruption, authoritarianism)

Current Trends

An Economy Dependent on its Gas Exports to China

In 2019, as in the past, the Turkmen economy will be mainly driven by its hydrocarbon production, mainly gas. Gas exports, almost exclusively to China (94%), are expected to continue. Nevertheless, despite its growing demand for gas, China is seeking to diversify its sources of supply, which could be at the expense of Turkmen gas. Gas exports to Russia, which may resume in 2019 after a 10-year halt, would help Turkmenistan to limit the effect of a potential reduction in Chinese imports of Turkmen gas. Public investment (around 40% of GDP), concentrated in hydrocarbons, will notably benefit the construction of the TAPI gas pipeline that will serve Afghanistan, Pakistan, and India. However, its commissioning in Afghanistan, scheduled for the end of 2019, raises questions, given the security problems, even though the project's financing is not fully secured. Another component of the primary sector, agriculture will continue to play a significant role in the economy. Cotton production, mainly for export, is the second largest export item after hydrocarbons.

Household consumption in 2019 will be affected by cuts in the public sector and the removal of subsidies, already reduced in 2017, on gas, electricity, drinking water, and salt. Inflation will therefore remain sustained, reinforced by the rise in the prices of imported products following controls on trade in foreign currencies. A devaluation could take place in 2019, with the manat remaining largely overvalued (in July 2018, its exchange rate on the black market reached 25 manats to the US dollar, despite the official exchange rate being set at 3.5 manats). This would encourage inflation, further penalizing household consumption.

Balanced Budget and Gradual Reduction of the Current Account Deficit 

The various measures taken by the government to reduce its current expenditure following the fall in gas prices in 2014, despite their timid recovery, will make it possible to balance the public accounts in 2019. These measures were necessary, with gas revenues accounting for more than 80% of budget revenues. In addition to the removal of subsidies, the government has reduced the number of employees and wages in the public sector, and has privatized some public companies.

Regarding external accounts, although the current account will continue on an upwards trend, it will remain in deficit in 2019. However, the country has a trade surplus thanks to its exports of hydrocarbons (92% of total exports) and textiles/cotton (7.5%), despite the May 2018 US embargo on imports of Turkmen cotton, due to the use of child labor for its production. Imports, concentrated in capital goods and transport equipment, will remain lower. The trade surplus is extremely dependent on China, as well as on the price of gas and therefore oil, albeit indirectly. The imports of services necessary for the exploitation of hydrocarbons present in the country are responsible for the deficit in the balance of services and, ultimately, in the current account.

The President is Asserting his Power

In power since 2006, President Gurbanguly Berdimuhamedow is now serving his third consecutive term. The multi-party system, introduced in 2012, did not reduce the hold of his party (Democratic Party) in the March 2018 parliamentary elections. In addition, the appointment of his son, Serdar Berdimuhamedow, as Deputy Minister of Foreign Affairs suggests that the President (61 years old) is preparing him to take over the country. Although continued budget cuts could increase public discontent, with emigration increasing sharply since the beginning of their implementation, the severity of the security policy prevents any large-scale demonstrations and the government has banned men under 40 from leaving the country in order to limit the brain drain.

Turkmenistan's relationships with its neighbors appear to have calmed. In August 2018, the country signed an agreement with Uzbekistan, Kazakhstan, Azerbaijan, Iran, and Russia on the status of the Caspian Sea. This agreement could relaunch a trans-Caspian gas pipeline project to transport Turkmen gas to European markets via Azerbaijan. However, the security situation on the border with Afghanistan remains fragile due to the presence of the Taliban.

According to World Bank indicators, Turkmenistan is one of the lowest-rated countries in the CIS: the country ranks 196th out of 205 countries in the anti-corruption ranking and 201st for the quality of its regulations. The business climate remains difficult given the dominance of the public sector and its monopolies on the economy and trade, as well as price controls.

Source:

Coface (02/2019)
Turkmenistan