Clare Nuttall in Astana -

The Kazakh government aims to attract private sector funding for its multi-billion-dollar industrialisation programme, which spans sectors from agriculture to metallurgy, according to Finance Minister Bolat Zhamishev.

As Kazakhstan emerged from the crisis, the government started drawing up plans for the longer-term development of the economy. Growth has continued through 2010, driven mainly by higher commodities prices. "Global growth and demand for our main exports are the basis of Kazakhstan's economic growth," Zhamishev tells bne in an interview. "However, it is clear that the development of the oil and mining sectors is not without risk. The government has, therefore, set itself the task of diversifying the economy."

The 2010-14 state programme of forced industrial development was announced early this year in President Nursultan Nazarbayev's annual address to the nation. It envisages investments into a variety of areas including agriculture, construction, oil and gas processing, metals, chemicals and energy. The issue now is to fund these projects. "We plan to focus primarily on non-state funding," says Zhamishev. "The government invested heavily in the economy during the crisis, but the programme will be oriented towards foreign investors. The government's role will be to create the conditions to attract foreign investors."

The period before the crisis saw Kazakh banks channelling funds borrowed from international lenders into the economy, leading to the inflation of a speculative bubble in the real estate sector, and the near-collapse of several major banks. Virtually the entire sector is now working through portfolios of bad loans.

According to Zhamishev, the government does not expect Kazakh banks to be very actively involved in the funding major projects. "Our new system of regulation for the banking sector is intended to discourage reliance on external loans, although we expect to see some wholesale borrowing. We do not want to risk a recurrence of the recent crisis," he says.

Some deals have already been signed, including an agreement with a consortium of South Korean investors on construction of the Balkhash thermal power plant. Meanwhile, Russia's EuroChem is carrying out a feasibility study for the construction of a large chemicals plans. With each production line expected to cost upwards of $1bn, Eurochem is likely to turn to international capital markets.

The Kazakh government hopes some funds will be raised through the local stock exchange. "A lot depends on the development of the local stock market, and whether this can act effectively as a source of funding," Zhamishev says. "A strategy for the development of Samruk-Kazyna is currently being worked out, and I think this should include the listing of domestic companies on the domestic stock market. However, the debt and bond markets are also options. We are trying to systematically approach the question of creating conditions for borrowing by Kazakh corporates on foreign markets."

Kazakhstan adopted legislation on Islamic finance in early 2009; this now needs amendment in order to allow the Ministry of Finance to issue Islamic bonds. "The parliament is currently considering these amendments, and I expect that by the beginning of next year there will be no legal obstacles to the issue of a sovereign sukuk," Zhamishev says.

"However, the question of whether we will issue either a sukuk or a Eurobond is still open. We expect to reduce the budget deficit from 4.6% of GDP this year to 2.8% in 2011 and just 1.5% in 2013. Such a deficit could easily be financed on the domestic market, so there would be no need for international borrowing."

This does not, however, mean that plans to issue a sovereign sukuk have been abandoned, Zhamishev says. "Even if it is not required to finance the budget deficit it would still benefit the corporate sector by promoting the development of Islamic financial instruments in this country.

Top reformer

Meanwhile, the Kazakh government is working to remove administrative barriers to investment, adopting new tax and customs codes. The country was recently recognised as one of the top reformers in the World Bank's 2010 "Doing Business" report. The decision to join the Customs Union, Zhamishev says, will also increase the attractiveness of Kazakhstan as an investment destination. "For us, this is an economic project, with the goal of increasing access to new markets, especially Russia and Belarus," he says.

The future transformation of the Customs Union into a single economic space will allow Kazakh companies to compete in the Russian and Belarusian markets. However, several specific issues still need to be addressed. One is the need for a radical overhaul of Kazakhstan's veterinary system, which will enable exports of Kazakh meat. Astana is also in discussions with Russia with the aim of revising Russia's railway tariff system, which currently gives discounts to Russian state companies discounts, that are not extended to their Kazakh competitors. "This is a factor that significantly affects our companies' competitiveness," says Zhamishev. "We are aware it may be difficult to achieve anything. However, it is important for the government to work actively in all directions to ensure fair competition, and to support our businesses while staying within the rules of the game."

Entry to the World Trade Organisation remains a priority in both Kazakhstan and Russia despite the decision to form the Customs Union. "While our membership of the Customs Union raises certain issues that need to be resolved during the negotiation process, there is no conflict between membership of the two bodies," says Zhamishev. "It is a matter of reaching a compromise."