Kazakhstan’s slowdown weighs on Central Asian FDI performance

By bne IntelliNews July 30, 2015

Jacopo Dettoni in Almaty -

 

Foreign direct investment in Central Asian countries plus Mongolia decreased by 14% year-on-year to $14.5bn in 2014, according to the latest figures published in the 2015 World Investment Report by the United Nations Conference on Trade and Development (UNCTAD).

Weakening investment in Kazakhstan, the largest FDI recipient in the region, and Mongolia hit the performance of the region as a whole in 2014, whereas other major recipients such as Turkmenistan and Uzbekistan experienced growing foreign investment in the period.

“FDI flows to Kazakhstan fell by 6% y/y [to $9.56bn] in 2014, as a rise in equity investments was offset by a decline in intra-company loans,” the report reads.

Foreign investors remained focused on Kazakhstan’s oil and gas and mining sectors, which accounted for more than half of the FDI stock in the country, the report noted. Russian Polymetal International carried out the largest acquisition in the region in 2014 by taking over Kazakh gold mining company Altynalmas for $1.1bn.

On the other hand, the country struggled to shore up investment in sectors other than the extractive one as the economy slowed down to 4.3% in 2014 from 6% in 2013. British banking group HSBC sold its local branch to Kazakh Halyk Bank and another western financial group, US insurer AIG, scaled down its local operation in the year.

A new government led by Prime Minister Karim Massimov was appointed in April 2014 with a clear task to restore confidence among foreign investors. A few months later, parliament approved a new investment law granting generous incentives to investors developing projects in “key sectors” which came into effect on Janaury 1. Yet the new rules have yet to gain traction, with FDI falling by 24% in the first quarter of 2015, according to figures from the National Bank.

FDI in Mongolia fell to $508mn in 2014, just a fraction of the over $4bn of 2012 and 2013. Political and legal uncertainties, combined with fruitless negotiations between the government and mining powerhouse Rio Tinto over a multi-billion expansion of flagship copper and gold mine Oyu Tolgoi spooked foreign investors. A new government led by Prime Minister Chimed Saikhanbileg took office in November and eventually managed to strike an agreement with Rio Tinto in May. FDI inflows are now expected to pick up in the second half of the year and in 2016.

On the other hand, both Turkmenistan and Uzbekistan registered increasing FDI in 2014. Investment inflows in Turkmenistan increased by 3% y/y to $3.16bn in the year. They grew by 9% y/y to $751mn in Uzbekistan.

Both countries are experiencing an increasing influence of investors from South Korea, which are taking an active role in the development of the local oil and gas and petrochemical sectors.

“South Korea has strong trade ties with the region, particularly Uzbekistan, and is one of the largest foreign investors there, together with the Russian Federation, China and Kazakhstan,” the report noted.

“Businesses from the Republic of Korea are also heavily invested in Turkmenistan, with over $5bn worth of projects. During the visit by that country’s president to Uzbekistan in 2014, a further $5bn worth of FDI in the natural gas and chemicals sectors was announced.”

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