Michael Carter of Visor Capital -
Volatile markets have not been the only excitement in Kazakhstan this summer. Investors are trying to digest the impact of the sell-off in commodities, trying to guess its impact on the banking sector, witnessing the development of the national mining sector champion, as well as trying to understand the impact of the expected new tax law and a new natural resources law.
The sell-off in the commodity sector is leading to some concern over the bank sector, as a reduced flow of commodity earnings could lead to pressure on the currency, lower corporate deposit growth in banks, and possibly a deterioration of bank asset quality. We should remember that the current "low" commodity prices are significantly above people's expectations at the beginning of the year, and above most analysts' long-term expectations. We also note that the increasing tax burden on the resource sector is leading to higher government and National Fund income, which creates demand for the Kazakh tenge. We estimate that every $10-per-barrel change in oil prices moves the current account by about $4.5bn, and that the current account will stay positive with Brent crude prices averaging over $105/barrel this year. Essentially, we estimate that Brent would have to fall below $90/barrel for the rest of the year for Kazakhstan to have a current account deficit. And it was the spectre of a current account deficit that was causing worries last year about the tenge's stability and the banking sector's ability to repay its foreign liabilities.
On the mining front, we have seen Kazakhmys going from prey to hunter. Since an attempt by ENRC to bid for Kazakhmys earlier this year, Kazakhmys has strengthened its hand by acquiring a blocking minority stake in its rival. The commodity stocks' sell-off made acquiring this stake very manageable. Not only does this stake keep its former stalker at bay, but also it puts the fate of these two groups firmly in Kazakh hands - in line with government wishes. If there is a tie-up with any major international group, we would now expect the Kazakh elements to be dominant in the transaction.
The government has been drafting a new tax code feverishly, and responding to the various lobbying groups. The new tax law is expected to decrease the tax burden for non-resource sector companies, while raising it for the resource sectors. Not surprisingly, the most vocal lobbies are the oil and mining sectors. One of the biggest beneficiaries of the planned reduction in corporate income tax (from 30% to 15-20%) could be the banking sector. The new tax code could improve the after-tax cash flow of both the banks and of the companies representing a large portion of the commercial loan portfolios - thus alleviating some asset quality pressure.
Laws of the land
Just as the resource sector thought that it had had enough excitement, with oil export duties, increasing tax burden and all the fall-out of the Kashagan negotiations, August delivered another surprise with the announcement of a new Natural Resource Sector law. This law is expected to be presented to parliament in September - just when the parliament will be busy with the tax law - and is expected to replace all the current laws governing the mineral sector.
And then, due to external factors, another worry for the oil sector! A fire in Turkey on the Baku-Tbilisi-Ceyhan pipeline (which runs from Azerbaijan, through Georgia, to the Mediterranean), followed by the disruption to oil exports resulting from the Georgian conflict, has oil companies worrying over the security and diversity of their export routes from Central Asia. Other than the BTC, oil flows through Russia, is starting to flow to China, and to a minor extent flows to Iran. Oil swaps with Iran would appear to be the most logical and economical solution... if it is ever geopolitically acceptable.
For the resource sector, September should bring more certainty. The uncertainty on taxation has been stalling a number of transactions, and making share valuation a true guessing game. We expect the tax burden in the resource sector in Kazakhstan remaining below that in Russia.
September for the Banking sector will be about first-half results, and possibly news of the strategic investor front. While default spreads have been widening, we do not see any change in the banking sector's ability to repay their foreign liabilities, nor of the government's firm intention to ensure that these foreign liabilities are being repaid.
While GDP figures are coming out in line with our expectations, and at the lower end of the government's projections (5.3% real growth in the first six months), the figure to focus on is inflation. Our assumption is that August represents the peak, at just over 20%, and that this should decline to a favourable year-on-year effect starting in September. Getting the year-on-year figure down to 10-11% by December is key to the government's ability to maintain price stability objectives. We estimate that food accounts for 40-50% of the CPI basket, which does help to explain the high inflation of the past year.
Michael Carter is CEO of Visor Capital
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