Kazakhstan: On the Mends

A warm air of relief blows through the sunny streets of Almaty. After skirting the debilitating effects of the global credit crunch, Kazakhstan regrouped and is resuming its expansion. The Kazakh economy is expected to grow 5.3% y/y in 2008, after expanding 8.5% y/y last year. Although the pace of GDP growth is good, it is still half of the average growth rate that was posted since the start of the decade. Fortunately, the boost provided by the commodity boom helped offset the damage of the banking sector crisis. Strong capital inflows, particularly into the mining and energy sectors, kept the momentum going. As a result, the Kazakh economy is back on its feet, and GDP growth should accelerate above 8% y/y in 2009.

Once a distant outpost of the Soviet Union, Kazakhstan is now the most prosperous country of the former republics. Although not a shining example of democracy, President Nursultan Nazarbayev implemented reforms that transformed Kazakhstan into a modern consumer society. As a result, President Nazarbayev won the love and admiration of his people. The liberation of prices, factor mobility and a relatively open capital account helped modernize the economy. Foreign direct investment into the mining and energy sectors harnessed the country’s vast natural resources, and put it on track to become an exporting powerhouse. In order to accelerate the process, Kazakh banks tapped aggressively into the international capital markets—using foreign funds to supplement the meager deposit base. The capital was used to develop new housing, revitalize infrastructure and construct modern office parks. Today, six lane highways connect parts of Almaty and a new financial district could convert the city into a regional financial center. However, the problems in the international capital markets during the latter part of 2007 left the country reeling, and Kazakh banks were faced with a flurry of amortizations. Alliance Bank suffered the most, since it was the most aggressive in using external funds to expand its business base. Fortunately, the tightening of credit conditions, the re-profiling of debt into local instruments and easy access to the National Oil Fund stabilized the banks, thus allowing them to meet all of their obligations. The austere financial environment led to a softening of the housing market, but overall demand remained strong—as evidenced by the persistent inflation rate. Consumer prices are expected to rise above 20% in 2008. The tenge also remained steady throughout the whole episode—suggesting a stable macroeconomic environment. The overall situation is clearly improving, but there are some risks on the horizon.

The most important problem is the endless delays in the development of Kashagan. The oil field, which was supposed to become operational in 2005 is now supposed to begin production in 2013. In the interim, Kashagan is not producing anything. Most of Kazakhstan’s current 1.45 million barrels of oil per day (bpd) production is from the Soviet-era Tengiz and Karachaganak fields. Nevertheless, with an estimated 9 to 16 billion barrels of commercial reserve, Kashagan could transform Kazakhstan into one of the world’s top oil producers. In addition to ample energy reserves, the country is also taking advantage of its proximity to the Asian markets. Most of the Kashagan oil field will be slated for the Kazakhstan-China pipeline, which was developed by CNPC and KazMunayGas. The pipeline, which became operational in 2006, will eventually have a capacity of 2.4 million bpd. In the interim, the country will rely on its existing oil production and mining resources to meet its external obligations. Kazakhstan has the world’s second largest uranium, chromium, lead, and zinc reserves, the third largest manganese reserves, and the fifth largest copper reserves. It is also an exporter of diamonds and potassium. Connected to China by rail, it has been able to direct much of its production to Asian markets. The treasure trove of natural resources makes Kazakhstan highly resistant to the volatility in the international markets. Investors are starting to grasp the resiliency of the Kazakh economy. This is why asset prices are recovering and corporates are regaining access to the international capital markets. However, not all asset prices recovered, and there are still bargains to be found on the windy steppes east of the Caspian Sea.