Kazakh economic strength seen "high" but still too oil reliant

By bne IntelliNews June 16, 2014

Naubet Bisenov in Almaty -



Kazakhstan's economic strength is "high" thanks to the economy’s strong GDP growth, its relatively large size and improvements in competiveness, according to Moody's Investors Service. At the same time, the rating agency cautions that this assessment reflects the country’s moderate wealth levels and GDP growth volatility, its high dependence on the oil sector and associated challenges to diversify the economy.

In a credit analysis of Kazakhstan published on June 10, Moody's says the country's key credit strengths include strong economic growth, its relatively large economy, a very low public debt level and correspondingly very high debt affordability.

The country posted real GDP growth of 6% in 2013, up from 5% in 2012, driven largely by private consumption and to a lesser extent by investment, the report says. Growth in private consumption was, in turn, driven by strong growth in loans to households (above 25%), while real wage growth has slowed to lower single digits since mid-2012 (under 5%).

In the first quarter of 2014, Kazakhstan’s GDP growth has unexpectedly slowed to 2.9% on year compared with 5.9% in the last quarter of 2013, reflecting a loss in investor confidence owing to the Ukraine crisis, reduced demand from emerging market economies and lower growth in the mining sector, the report says. "Despite the recent slowdown, we still expect relatively strong full-year real GDP growth of around 5% in 2014, albeit with elevated downside risks," Moody's says.

Moody's expects lower credit-fuelled consumption, delayed oil production at the Kashagan oilfield and the Ukraine crisis to be "partly" be offset by the recently announced KZT1 trillion ($5.5bn) fiscal stimulus programme. The Kazakh government intends to channel KZT1 trillion from the National Oil Fund to fuel the economy, half of which will be spent jointly with international finance institutions, including the EBRD. The development bank and the government signed a new partnership agreement to increase investment and speed up reform in the country.

The government's decision to attract the EBRD and other international financial institutions to co-finance investment projects is seen as an acknowledgment by Astana that the protracted delay in the start of commercial production at the giant Kashagan oilfield is likely to damage the economy significantly, threatening to prevent the government from meeting its GDP growth and economic performance targets in the coming years. Production at Kashagan started last September, but was suspended in October after the detection of a leakage from gas pipelines linking the field with offshore facilities. NCOC, the operator of the project, is now working on replacing the entire 70km-long pipelines. Kashagan was expected to resume output in July, but it may not take place until the end of 2015. The field was expected to produce 2m-2.5m tonnes of oil in the second half of 2014 when it was supposed to resume production. The government is now holding talks with other oil producers to compensate for the Kashagan shortfall.

Investors wanted

In addition to cash for the economy, the government also announced a massive package of incentives to attract foreign investors to the non-extractive sectors, including tax breaks, investment subsidies, visa free travel and free import of labour. Foreign investors investing at least $20m will be exempt from corporate and land tax for 10 years and from property tax for eight years. The government will also compensate 30% of their costs after they commission an industrial facility, and it promises that tax, migration and environmental protection legislation will remain intact for them for 10 years. President Nursultan Nazarbayev signed these measures into law on June 12. At a meeting with foreign investors on June 12, Nazarbayev also announced that Kazakhstan was unilaterally going to abolish visas for citizens from 10 countries with highest investment activity in the country – the UK, the US, France, the UAE, Japan, South Korea, The Netherlands, Germany, Italy and Malaysia.

Foreign investors and international finance institutions welcome Astana's measures to improve the investment climate in the country. The EBRD's Kazakhstan director Janet Heckman told journalists in Almaty on June 9 that her bank was "extremely" pleased with these measures and had credited the government for consulting international finance institutions and domestic and foreign investors on this issue. Combined with Kazakhstan's accession to the WTO, which the government expects to take place this year, and the signing of an extended partnership agreement with the EU also in 2014, as well as the announced partnerships with the EBRD and other institutions, it's a significant effort to ensure high levels of economic growth, Heckman said.

EBRD president Suma Chakrabarti added that competition for foreign investment among emerging markets was "very hot", so he and other foreign investors would be highlighting measures to improve the investment climate at the meeting with Nazarbayev. "This is a country which many investors are looking at... and to have the best investment climate possible is very important," Charabarti said.

Moody's also expects Kazakhstan's accession to the WTO to be beneficial, mainly thanks to institutional improvements with regard to trade and investment regulations, and dispute settlement procedures. At the same time, it believes, the country's integration with Russia and Belarus into the Eurasian Economic Union (EEU) poses challenges due to Russia's dominance in the bloc and trade barriers with non-member states.

The rating agency assesses Kazakhstan’s fiscal strength as "very high", but warns that its success with fiscal consolidation depends on changes in oil prices, given that around 50% of budget revenues are oil related in 2013, according to the IMF.

In addition to high exposure to shocks from the oil sector, Kazakhstan’s key credit constraint is related to its low institutional strength, Moody's says, as reflected in a high level of corruption, low government effectiveness and a weak rule of law. On World Bank Governance Indicators in 2012, Kazakhstan scored "very low" for government effectiveness (23rd percentile), rule of law (21st percentile) and corruption (12th percentile), Moody's adds.

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