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When oil and commodity prices were riding high, Kazakhstan’s economic and investment growth trajectory was looking strong. But the country’s heavy reliance on strong global oil prices has changed that climate.
No one would dispute Kazakhstan faces sizable economic challenges, but the International Monetary Fund in August revised upward the 2015 economic growth forecast to 3.25 percent. That’s much slower than the 6 percent growth rate Kazakhstan grew at in 2013, but still a solid economic forecast.
Kazakhstan is a huge territory with a population of more than 17 million, making it the largest economy in Central Asia, and the second-largest post-Soviet oil producer after Russia. And while investment has slowed down, several sectors are poised for growth in the coming years, including wireless telecommunications as more and more smartphone subscribers come into the market.
Kazakhstan’s ascension to the World Trade Organization (WTO) in June 2015 is expected to lead the privatization of a number of state-owned enterprises, including companies in the telecommunications sector.
But even as global investors look at future opportunities in Kazakhstan, the macroeconomic pressures should not be minimized.
“These are some difficult times in Kazakhstan. It’s the combination of the oil price, slowing Russian economy and ruble, as well as, the Chinese slowdown and yuan devaluation,” says Zach Witlin, a Eurasia Group associate who covers Central Asia and other countries in the region, including Kazakhstan.
The combination of weak global oil prices and the devaluation of the Kazakh currency is revealing addtional fissures for the banking sector in Kazakhstan.
“S&P assumes that Kazakh banks’ business prospects will feel constrained over the remaining part of 2015 due to the worsening macroeconomic environment, deteriorating borrowers’ creditworthiness, and the sharp weakening of the tenge,” according to a report from Standard & Poor’s issued on August 31st, adding that it sees the credit risk for Kazakh banks will likely increase over the next year.
In late August, Kazakhstan received a $1 billion loan for its economy and to bolster conditions for investment from the Asian Development Bank (ADB). The ADB’s five-year loan also will assist Kazakhstan with its plans for upgrading its domestic infrastructure, and also contribute to its plans for the modernization of its government institutions.
“There has been a flood of Russian-made goods into Kazakhstan, which has led to lower revenues and that has hurt local manufacturers. The dumping of Russian goods on the Kazakh market has made local manufacturers far less competitive,” Witlin adds.
Witlin is encouraged by the government’s decision to move to a free-floating exchange rate for the tenge. While the devaluation of the currency further eroded consumer spending power, Witlin said it’s a step in the right direction toward bringing Kazakhstan into the global trading system.
Witlin says in the longer-term the currency reform will enhance the overall foreign direct investment climate, and improve Kazakhstan’s companies on the world trade stage. He says there is some political risk in Kazakhstan, and questions remain whether the government will successfully navigate the current complicated economic environment.
By Mark Berniker