OUTLOOK 2014: Eurasia to stand on shoulders of giants

By bne IntelliNews December 20, 2013

Clare Nuttall in Astana -

Economies across Central Asia and the Caucasus are set to continue to grow strongly in 2014, powered by natural resources investment. However, their fate also rests heavily on the giants of the neighbourhood.

Economies across most of the Central Asia and Caucasus region grew strongly in 2013. The launch of new natural resources projects in countries such as Kazakhstan, Mongolia and Turkmenistan puts all three countries on track for continuing growth in 2014. They are, however, vulnerable to various extents on the Russian economy and any slowdown in Chinese commodities demand.

Elsewhere, political uncertainty has held back growth in Georgia. Meanwhile, growing resource nationalism in Kyrgyzstan and Mongolia also threatens to deter investment.


Kazakhstan, the region's largest economy, is on track for 5.6% growth in 2013, according to the European Bank for Reconstruction and Development (EBRD), which raised its forecast in October, and 5.5% in 2014. The government is slightly more optimistic, forecasting 6% growth in the 2013 financial year. Official data shows 5.8% GDP growth in the first ten months of the year. Inflation is expected to fall below the 6-8% the central bank is targeting for 2013.

Kazakhstan's currency, the tenge, has depreciated gradually against the dollar through 2013. The central bank's foreign currency reserves dropped 20% in January-October. However, gold reserves increased to $6bn and the National Oil Fund to $68.7bn as of the end of October.

VTB Capital describes Kazakhstan as "an oasis of calm" compared to other former Soviet countries such as Ukraine and Belarus. It cites stable and relatively high oil prices, as well as steady increase in consumption and growing investment, contributing to steady growth through the year.

The long-awaited launch of production at the giant Kashagan oilfield on September 11 has had little impact on oil production and GDP growth so far. Due to technical problems, the field produced for less than three weeks overall, and output is not expected to resume until 2014. However, Kazakhstan's Economy Minister Yerbolat Dosaev said in November that the country remains on track to achieve its 2013 oil production target of 82m tonnes.

The rush to start production at Kashagan contributed to a peak in imports in the second quarter of 2013, causing the current account surplus to fall from $1.9bn to just $300m, though it is expected to rebound in late 2013 and 2014.

Industrial production was up by just 1.8% in the first half of 2013, compared to GDP growth of 5.1%. However, services - especially trade and communications - grew rapidly, while the agricultural sector recovered after a poor harvest in 2012.

Exports are no longer a main growth driver for Kazakhstan, Visor Capital analysts wrote in November. "Internal demand, i.e. robust domestic consumption, contributes to the growth the most. Increasingly robust internal demand looks set to be the main driver of growth, contributing to significant growth in the services sector," the note said.

High levels of government spending on infrastructure and industrial projects has continued in Kazakhstan and other countries in the region. The government is now drawing up plans for the successor to its 2010-2014 accelerated industrial innovative growth programme. The initial programme was part of the government's anti-crisis response, while the new programme is expected to have a stronger focus on diversifying the economy and high-tech development.

In early 2013, the government announced plans to return to the international capital market with Kazakhstan's first sovereign Eurobond in over a decade. However, Astana's plans to raise around $1bn were later put on hold due to international market conditions. The issue may take place in 2014 if conditions are right.

Meanwhile, state-owned companies have carried out successful debt issues in 2013. Oil and gas KazMunaiGas (KMG) raised $3bn through a two-part bond issue in April, which the company said was hugely over-subscribed. Agricultural holding company KazAgro has also successfully issued $1bn worth of Eurobonds. Other state and quasi-state entities may tap international markets in 2014.

For most of 2013, Kazakhstan has been working to carry out a planned merger of the country's ten private and one state pension funds into a single fund under the control of the central bank. The deadline for the merger, a key component of Astana's pension reform plans, has been pushed back, but central bank governor Kairat Kelimbetov announced November 13 it will be completed in the first quarter of 2014.

The reform of the pensions system has caused controversy within the country, with plans to raise the retirement age for women sparking enough public dissent to force the government to extend the transition period. Meanwhile, brokers and investment houses say their businesses have suffered from new rules restricting the asset classes in which pension funds can invest. This has also resulted in a fall in liquidity on the Kazakhstan Stock Exchange.

Five years after the international financial crisis hit Kazakhstan's banking sector, the country's banks are still struggling to work through non-performing loans. As of 2012 Kazakhstan had the world's highest proportion of non-performing loans (NPLs), according to a World Bank report, and there has been slow progress in 2013.

Since his appointment in September 2013, central bank governor Kairat Kelimbetov has stressed that resolving the asset quality issues is the main goal for the bank. He has set a target of bringing NPLs down to 10% by January 2016.

Visor Capital analysts wrote on December 6 that 2014 "could mark a turning point for the Kazakh banking sector in terms of loan quality if NBRK takes firm action. Lowering NPLs significantly appears feasible for the banks that are fully provisioned." However, the report adds: "Overall, the banking sector in Kazakhstan is still convalescing and will not become healthy in the near term."

In December, Kazakhstan's sovereign wealth fund Samruk-Kazyna finally sold some of the banking stakes that were nationalised in February 2009. On December 12, the fund announced that it will sell its 79.88% holding in Temirbank and a minority stake in Alliance Bank to Kazakhstani oligarch Bulat Utemuratov for an undisclosed sum.

Meanwhile, BTA Bank, the country's largest bank pre-crisis, remains in Samruk-Kazyna's hands after an attempt to offload the troubled bank on Halyk Bank fell through in November. There are now rumours of an attempt to sell it to Kazkommertsbank.


Elsewhere in Central Asia, despite a conspicuous lack of market reforms, Turkmenistan is one of the region's fastest growing economies thanks to its huge reserves of natural gas. Coupled with high public sector investment, the economy is expected to achieve GDP growth of over 10% in both 2013 and 2014, according to the IMF

The start of exports from its largest gas field Galkynysh in September 2013 will reinforce Turkmenistan's position as China's top supplier of pipeline gas. Ashgabat plans to increase gas exports to the Chinese market to 65bn cubic metres a year by 2020, as well as targeting south Asian countries through the planned Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline.

President Gurbanguly Berdymukhamedov has initiated modest economic reforms, including a small-scale round of privatisation in March 2013 and a partial privatisation of housing stock. However, the country's oil and gas assets - easily the most interesting for investors - are not being put up for grabs in the foreseeable future.


Uzbekistan's steady economic growth has been overshadowed by a power struggle among the elite in the second half of 2013. This has highlighted the political risks associated with the declining heath of 73-year-old President Islam Karimov. Like two other Central Asian leaders - Nursultan Nazarbayev in Kazakhstan and Emomali Rakhmon in Tajikistan - Karimov has ruled for more than two decades, and the question of his successor looms ever larger.

Gulnara Karimova, was previously considered a potential successor to her father, but increasingly looks to be losing her grip. In 2013, her television stations have been taken off air and other Uzbek-based businesses shut down. Karimova has suggested that the problems are linked to a move by National Security Service chief Rustam Inoyatov to stake his own claim to the throne. Speculation says other candidates include Deputy Prime Minister Rustam Azimov and Prime Minister Shavkat Mirziyayev.

Despite the political uncertainty, and a continuing decline in oil production, Uzbekistan's economy is set for 7.5% growth in 2013 and 8.0% in 2014, the Asian Development Bank forecasts. Sectors such as construction, services, communications and agriculture are performing strongly. Uzbekistan has also been stepping up investment into oil and gas exploration and alternative energy. Russian oil and gas company Lukoil will invest $5bn in the country between 2014 and 2018, while state owned Uzbekneftegaz is working on a $4bn gas-to-liquids project with South Africa's Sasol and Malaysia's Petronas.


The withdrawal of international forces from Afghanistan in 2014 is a source of uncertainty for all the Central Asian republics, none more so than Tajikistan. The country already dedicates considerable resources to combating insurgency and drug trafficking, while increasing its economic engagement with Afghanistan.

President Emomalii Rakhmon was re-elected for a fourth term in November. The main challenges for the Tajik government also remain constant: lifting the country out of poverty, ensuring energy supplies for industry and households, improving the business climate, and maintaining stability.

The economy is highly dependent on international factors, in particular remittance flows from Russia, which make up almost 50% of GDP. Any slowdown in the Russian economy in 2014 therefore could have a negative impact on Tajikistan. There are also concerns about the stability of the banking sector amid an increase in NPLs in 2013.


The biggest question for Kyrgyzstan at the end of 2013 and going into 2014 is how the stand off over the Kumtor gold mine - which accounts for around 12% of GDP - will be resolved. The government has been trying to strike a deal with owner Centerra Gold to give the state a bigger holding. However, an overwhelming majority in the parliament rejected in October a draft deal handing the state 50% ownership.

MPs insist the government should receive a stake of at least 67%. A negotiated settlement is expected, despite the calls for the mine to be nationalised. "[W]e believe the two sides of the conflict will eventually have to reach some mutually beneficial solution considering the asset is very complicated operationally and is of extreme importance for the Kyrgyz budget," says a report from VTB Capital.

By far the most open of the Central Asian republics politically, Kyrgyzstan has been plagued by demonstrations and unrest, including attacks on foreign owned mining operations. However, GDP recovered strongly in 2013, with the IMF forecasting growth of around 7% in both 2013 and 2014.

Another major event coming up in 2014 is the closure of the Manas Transit Centre, which has been used by US and international forces to support operations in Afghanistan. "The loss of nontax revenues related to the closure of the Manas Transit Center in 2014 will create headwinds for the fiscal consolidation that is needed to reduce vulnerabilities, rebuild policy buffers, and ensure macroeconomic stability and debt sustainability," the IMF warns. Kyrgyzstan may, however, expect more support from its main patron Russia.


Mongolia is also in the midst of a tussle over a major mining project. Talks between the government and mining giant Rio Tinto over the $5.1bn second phase development of Oyu Tolgoi are still rolling onwards. One of the world's largest copper-gold deposits, the project is expected to be a major growth driver over the next few years - but it is not yet clear when work on the underground mine will begin.

Rising resource nationalism has been hurting investment. Mongolia saw a 49% slump in FDI in the first nine months of 2013, mainly due to the introduction of the 2012 Strategic Entities Foreign Investment Law (SEFIL) and uncertainty over the result of the June 2013 presidential election. However, with the re-election of Tsakhiagiin Elbegdorj and the adoption of changes to the SEFIL, FDI inflows are expected to revive in 2014.

Growth of around 13% is forecast for 2013, despite a slowdown in the first half of the year caused by a drop in Chinese demand for coal and falling commodities prices. Higher state spending, growing agricultural output, and the start of exports from Oyu Tolgoi all helped to buoy growth.

The ADB forecasts 2013 will finish with economic expansion of 12%, with growth set to swell to 13% in 2014. "The short- to medium-term prospects for the Mongolian economy are subject to trends in [China] and the global economy, and expansive fiscal policies historically make it vulnerable to external shocks," the development bank says.


The largest economy in the Caucasus, Azerbaijan, achieved higher than expected growth in 2013, as oil production revived and the non-oil economy continued to expand, with government support. The IMF forecasts 3.5% growth for the country in 2013, rising to 5.6% in 2014.

VTB analysts write: "Azerbaijan is a very likely new candidate to come to the international capital markets in the foreseeable future, with authorities recently cautiously highlighting such a possibility, mostly in order to support private issuers." State oil and gas company SOCAR announced in mid-September that it may return to the international debt market in 2014 with an issue of up to $3bn. Azerbaijan's largest bank, the International Bank of Azerbaijan, has also indicated it is considering a $500m Eurobond issue.

In the oil and gas sector, 2013 was a year of major decisions, with the international consortium developing the Shah Deniz field selecting the Trans-Adriatic Pipeline (TAP) to carry gas from the Turkish border into central Europe. Investment spending is set to increase in the coming years with work on the second phase development of Shah-Deniz, and construction of the TAP and Trans-Anatolian gas pipeline (TANAP). A final investment decision on Shah Deniz II was signed on December 17, which will trigger the start of exports to Europe by 2019.


By way if contrast, Georgia saw investment decisions on pause amid political uncertainty in the run-up to the October 2013 elections. However, the Georgian Dream coalition is now in control of both the presidency and the parliament, and a period of greater stability should be ahead.

Georgia saw a modest revival in FDI in 2013, with investment attracted in the first nine months of 2013 slightly above that seen in the same period of 2012, rising 2.8% to $697.3m. In September, the Georgian government launched the $6bn Co-Investment Fund which will primarily target infrastructure and logistics projects.

A report from SP Advisers forecasts that Georgian GDP growth will remain weak in the first quarter of 2014, after a slowdown in 2013, sparked by sluggish growth in Turkey, as well as delayed investment. However, it forecasts that economic expansion will increase from an expected 1.7% in 2013 to between 2.5% and 3.0% in 2014.

Since Georgian Dream's victory in the 2012 parliamentary elections, the government has made overtures to Russia, resulting in a re-opening of the Russian market for Georgian wine, mineral water and other products. However, Russia's recognition of the breakaway Georgian republics of Abkhazia and South Ossetia as independent states remains a stumbling block in relations.


Armenia made its debut on international capital markets in September 2013, successfully placing its first sovereign Eurobond - dubbed the "Kardashian bond" by international bankers.

"Prior to the inaugural Eurobonds issuance, foreign portfolio investors' opportunities related to Armenia were rather limited," says VTB Capital. "The local bond market, as is the case in neighbouring Georgia and Azerbaijan, is small and generally tight on liquidity. This left the local deposits market as probably the main straightforward opportunity."

While growth accelerated to 7.5% in the first quarter of 2013, the ADB forecasts the year will end with GDP having expanded by just 4.5% in 2013. The bank forecasts 4.6% in 2014, based on the expected slowdown in Russia and the dampened recovery in the Eurozone, as well as price hikes for gas and electricity.

Earlier in 2013, Armenia looked to be on track for closer integration with Europe, until a U-turn by President Serzh Sargsyan on September 3. Sargsyan announced that he would take Armenia into the Customs Union, which scrapped a plan to sign an EU Association Agreement at the Vilnius summit in November.

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