OUTLOOK 2013: Central Asia still going strong

By bne IntelliNews December 4, 2012

Clare Nuttall in Astana -

Kazakhstan's growth slowed in the second half of 2012 as the Eurozone crisis and the Chinese economic slowdown caused a fall in demand for its exports including uranium, copper and aluminium. However, growth across Central Asia and the Caucasus is set to average 5.5% in 2012, with a slight increase expected in 2013.

In the first nine months of 2012, Kazakhstan's GDP grew by 5.2% compared with the same period of 2011, according to government data. In October, the economy ministry revised its forecast for the year to 5.4%, down from an earlier government forecast of 5.8%. The International Monetary Fund (IMF) and European Bank for Reconstruction and Development (EBRD) both forecast growth of around 5.5% for 2012, with the IMF anticipating growth will pick up to reach 5.7% in 2013.

Investment bank Troika Dialog (now Sberbank CIB) points to a "serious deceleration" in Kazakhstan's industrial sector, which grew by just 0.7% in the first eight months of 2012. Although the services sector, in particular retail and transportation, achieved double-digit growth, this was offset by 1.9% growth in construction and a 0.3% contraction in the agriculture sector after the grain harvest was hit by drought. The "Kazakh economy lacks powerful growth engine such as foreign trade," Troika wrote in an analyst note on September 27. "If economic problems persist in the developed world and the Chinese economy slows further, one should not expect any improvements in Kazakhstan's economic performance next year (there are even more chances it could deteriorate)."

Oil output is expected to grow in 2013 when the massive offshore Kashagan oilfield comes online in the first half of the year. The long-awaited launch of commercial production at Kashagan is seen as the beginning of a steady increase in oil production that should last for several decades. Opec forecasts that oil production will increase from an average of 1.58m barrels per day (b/d) in 2012 to 1.65m b/d in 2013. After being caught on the hop by the onset of the first wave of the crisis in 2008, Astana has put in place contingency plans if oil prices fall sharply.

On November 20, Fitch Ratings upgraded Kazakhstan's long-term foreign currency rating to 'BBB+', a move the agency said reflected the strengthening of Kazakhstan's sovereign external balance sheet, low government debt and healthy growth prospects. Kazakhstan has continued to accumulate oil revenues in the National Fund, and Fitch forecasts sovereign net foreign assets will reach 45% of GDP by end 2014.

Inflation in the first nine months of 2012 has been well below the National Bank's target of 6-8%, although it is expected to accelerate slightly by the end of the year. Visor Capital forecasts a year-end inflation rate of 6.2%. Unemployment has crept upwards, reaching 5.3% in September.

Kazakhstan's banking sector is gradually recovering from the 2008 crisis, but the level of non-performing loans remains high, at 36.7% as of September 2012. The second round of debt restructuring for BTA Bank is set to be completed by the end of 2012 after the bank offered unexpectedly favourable restructuring terms to creditors. Troika says the sector "continues to gradually turn the corner, with a leaner and more balanced post-crisis banking system able to deliver low teen loan growth in the coming years". However, the EBRD warns that several indicators in the sector remain weak.

Best of the rest

Elsewhere in Central Asia, both Turkmenistan and Uzbekistan saw robust growth, albeit a little slower than in 2011, forecast at 10% and 7.5% respectively for 2012 by the EBRD. Both countries have announced privatisation plans for 2013. Azerbaijan, which has seen a drop in oil production offset by strong growth of the non-oil sector, is however expected to see GDP growth decline from 3.9% in 2012 to 2.7% in 2013.

Overall, countries in the Central Asia and Caucasus region are making a "solid recovery" from the international economic crisis, with the IMF forecasting average growth of around 5.5% for 2012 and 2013. This reflects both healthy revenues for oil and gas exports from the region's energy exporters, as well as remittance inflows to the energy importers.

The exception is Kyrgyzstan, where a drop in gold production because of technical problems at the Kumtor mine has brought 2012 GDP forecasts to close to zero, but a recovery is expected in 2013.

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