Clare Nuttall in Almaty -

Kazakhstan's economy is slowing faster than the government predicted. As the crisis forces changes in the economy, Visor Capital believes there is a chance for Kazakhstan to achieve more stable and sustainable growth in the future, but careful planning and improvements in education are needed.

Data for the first quarter of 2009 indicates that the Kazakh government was being overly optimistic in its expectations of 1.0% real GDP growth for the whole of 2009. In the first quarter, there was a 17.7% year-on-year decline in nominal GDP; the real GDP decline was 2.2% on year.

Yuriy Khramtsov, the economist at Visor Capital, points out that while Kazakhstan's Statistical Agency reports a 4.6% year-on-year decline in industrial production during the first quarter, electricity production and transportation data suggest the decline could have been nearer 8-15%. "Therefore, we expect that a real GDP decline of 3-5% could be a better reflection of the situation," Khramtsov says. He reckons the Statistical Agency could've overestimated nominal GDP in services, whose share in GDP suddenly grew to 66% from a historical average of 55-59%. "A real GDP decline of 3-5% [on year] looks natural, given that real GDP growth in 2000-2007, when external conditions were overly positive for Kazakhstan, was above 9.0% year on year," he says.

Visor considers that, taking into account the real and nominal GDP data, the situation in the economy could be more difficult than the Kazakh government is saying publicly. However, the situation won't be catastrophic because of Kazakhstan's significant foreign reserves, which amount to $41.9bn, including the National Fund. "These resources will help to avoid too drastic changes and extremes during the process of decreasing misbalances in the economy," says Khramtsov. "The crisis could require structural changes to be made, could require the creation of a system that would prevent misbalances and bubbles developing in the future, and raise the quality of business planning. Probably, Kazakhstan should have sacrificed too rapid growth for more sustainable and thoughtful development."

Property perils

The perils of excessive growth became all too apparent with the collapse of Kazakhstan's real estate bubble in mid-2007. Khramtsov points out that business plans for construction projects were based on high prices, with developers believing there would be demand for space at $4,000 and up to $10,000 per square metre (sqm). In 2005, prices for Almaty residential real estate had already risen more than fivefold since their nadir in the late 1990s, but were still under $1,000 per sqm; just two years later, they passed the $3,600-sqm mark.

Construction projects are still going ahead after the government doled out funds in late 2008. Before the crisis, developers had bought up many sites in Almaty and demolished the existing buildings; they now need to build something to get at least some of their money back. There is also still a real demand for new properties, since most residential real estate is in Soviet-era buildings. "People want to improve their standard of living. The question is, can they afford it?" says Khramtsov. Analysis by Visor shows that with 12.7% of the total population in Almaty and Astana holding 66.4% of Kazakhstan's $11.5bn individual deposits, 1.6% of the wealthiest people in the country (255,000 people) hold 44.1% of deposits - $21,200 per person plus foreign currency of $54,800 per person. This means the section of the population able to buy Almaty's $500,000 apartments is very small.

In 2007, when prices were at their peak, the ratio of median house price/median household income reached 23 - more than twice the ratio in Los Angeles, the least affordable market among developed economies, according to the 2008 International Housing Affordability Survey. "This disparity, which is characteristic of many emerging markets, makes demand at high prices limited to an elite group. Demand is relatively inelastic," says Khramtsov. According to Visor, in a worst-case scenario, prices for residential real estate in Almaty could still fall by a further 50%.

Learning nothing

A fundamental problem for Kazakhstan's development is the lack of investment in education. With the majority of university professors and schoolteachers underpaid since the early 1990s, morale within the education system is low, which has resulted in a lack of motivation among students. If the government's ambitious plans for modernisation of the economy are to be carried out, the quality of human resources will probably need to be improved, says Khramtsov.

Another issue that needs to be addressed is the high cost of final borrowing. "Currently, banks offer credits at around 15%, which is a very high rate for real economy projects," says Khramtsov. "We believe that the overheating of the economy, which lower rates could cause, may be prevented by stricter requirements for efficiency of companies which borrow funds from banks."

According to Visor, Kazakhstan achieved its greatest success in attracting foreign investment to resource sectors and modernization of the construction industry, but both sectors relied on imported parts rather than on domestically produced items, as well as benefiting from the high price environment that has now disappeared. Some fundamental changes need to be made if Kazakhstan is to continue on a more stable path once economic growth resumes.

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