Previous Quarterly Editions
Expropriation Risk: 56 58 56 58 Political Violence Risk: 38 41 40 40 Terrorism Risk: 33 34 35 34 Exchange Transfer and Trade Sanction Risk: 63 64 64 65 Sovereign Default Risk: 37 36 36 36
TREND ▲ OUTLOOK ►
Kassym-Zhomart Tokayev, who became interim president when long-time leader Nursultan Nazarbayev stood down unexpectedly in March, won the presidential election in June. This completes his legitimisation as Nazarbayev’s chosen successor, but it is clear that the former president is still very much at the centre of government through his chairing of the crucial security council and his control of the governing Nur Otan party. For his part, Tokayev has stressed the message of continuity in policy while deftly handling major set-piece political events and challenges such as the deadly explosion at an armament depot in June. However, the transition of power has suggested that Nazarbayev’s personal popularity may not carry over to the government as a whole, and Tokayev has already focused on improving social conditions for the low paid and state employees. Kazakhstan is still recovering from the 2014 collapse in commodity prices, which saw growth fall from 6% to 1% by 2016. Growth is likely to be around 4% this year and next as commodity prices remain lacklustre. Oil provides 50% of the country’s export revenue and there is hope that global prices may strengthen, but ongoing capital repairs at the country’s major oil fields may limit any short-term benefit. While there has been some improvement in the manufacturing, services and construction sectors, state spending and consumer borrowing continue to be the primary economic drivers. In July the government unveiled a revised budget for 2019 that includes pay rises for state employees, debt relief for low income groups, and funds for regional infrastructure development. While popular, this new spending will drive the non-oil fiscal deficit to above 8% in 2019 and beyond, while delaying the prospect of effective fiscal consolidation measures. President Tokayev has made extensive personnel changes among regional governors, overhauled the anti-corruption service and is holding regular meetings with foreign investors. However, he will be aware that similar initiatives in the past have had little tangible success in reducing corruption or improving the business environment. In the meantime, low-key preparations already appear to be underway for the next legislative elections. These are due in 2021 but Kazakhstan has a habit of holding its elections early and there are suggestions that these could now be held in the first half of 2020. Beyond that, Kazakhstan will soon face another transition, stimulated either by the death of Nazarbayev, now 79, or the end of President Tokayev’s first term in 2024, at which time he will be 71. In either case, it is uncertain whether Tokayev will be able to rely on the elite support that Nazarbayev has marshalled for him so far.
TREND ▲ OUTLOOK ▼
In the last 18 months the government has attempted to improve corporate governance by increasing safeguards for minority shareholders and creating a one-stop shop for licences. However, investors remain wary of the country’s weak enforcement of property rights, the extent of political influence over the judiciary, and the degree of endemic corruption. In July, following violent clashes at the Tengiz oil field over perceived differences pay between local and foreign workers, President Tokayev ordered a review of the renumeration policies of foreign companies to ensure equal pay. This could result in changes to local content rules and even, according to the president, changes to contracts with foreign investors.
TREND ► OUTLOOK ▲
The presidential election saw numerous demonstrations against the government in Almaty and Nur-Sultan that resulted in more than 1,000 arrests. These protests were largely directed from abroad by prominent exiled oligarch Mukhtar Ablyazov but also domestically by a new loose coalition of younger activists. While the protests have died down since the June election, the authorities remain sensitive to public displays of opposition given the poor social conditions. As a result, opposition activists remain subject to arrest and harassment. Despite President Tokayev’s conciliatory rhetoric, the government continues to tighten the political environment and in July it introduced new measures to monitor online activity. Strike activity, already an issue in the country’s oil fields, may become more prevalent elsewhere in the economy if the cost of living continues to rise.
TREND ▼ OUTLOOK ►
Although there have been incidents of terrorist-style violence within Kazakhstan, most notably a shooting in 2016, they have been minor and posed no direct threat to foreign assets or personnel. But with Central Asia being a source of recruits for Sunni Muslim extremist causes in recent years, the government has instituted measures designed to prevent radicalisation. As part of this agenda, Kazakhstan has been staging widely publicised missions to evacuate and rehabilitate its citizens who joined Islamic State operations in Syria.
Following the collapse of commodity prices and the Russian rouble, Kazakhstan was forced to abandon its support for the tenge in 2015 and move to a near-free float. Since then, the value of the tenge has more than halved against the dollar. Given Kazakhstan’s economic fundamentals, the currency is set to continue to track commodity prices and the state of the Russian economy, both of which remain weak. Recent spending commitments from the government and rising food prices will contribute to inflationary pressures. Although the annualised rate is already close to 5.5%, the central bank is confident that it can keep inflation within its target band of 4-6% for the rest of the year. Kazakhstan’s banking sector continues to struggle with non-performing loans, although a new plan to conduct an asset quality review should provide an opportunity to further stabilise the sector.
The government has brought the fiscal deficit down from 6% in 2015 to an expected 1% this year, although central government debt has crept up to some 16% of GDP. The nation fund, which is fuelled by oil revenue, is currently worth some 37% of GDP. While this is still a comfortable cushion, the fund and national budget remain heavily exposed to commodity price fluctuations. Corporate debt among state-owned enterprises such as state energy company KazMunaiGaz and state rail operator Kazakhstan Temir Zholy remains a concern for the government, which is ultimately responsible for their liabilities. Kazakhstan successfully issued its first Eurobond in late 2018, which was oversubscribed.
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