Previous Quarterly Editions
Expropriation Risk: 56 58 60 60 Political Violence Risk: 40 40 38 40 Terrorism Risk: 35 34 34 32 Exchange Transfer and Trade Sanction Risk: 64 65 65 67 Sovereign Default Risk: 36 36 37 40
TREND ▲ OUTLOOK ▲
The COVID-19 crisis is the first real test for President Kassym-Zhomart Tokayev, who marked his first year in office in March 2020. During this time, he has attempted to forge a political identity that is separate from that of his powerful predecessor, Nursultan Nazarbayev. However, the former president remains a very present political actor and it is hard to identify any specific changes that Tokayev has been able to deliver. His administrative reforms appeared to have stalled and proposals to liberalise the laws on political parties and public demonstrations are either yet to emerge or have proven less consequential than many had hoped. Instead, Tokayev is consistently undermined by the presence of Nazarbayev and his daughter, Senate Speaker Dariga Nazarbayeva, who both appear at times unsupportive of the president’s agenda. Nazarbayeva is clearly building her own political profile to position herself as the obvious successor to Tokayev. Much effort has been put into boosting her image ahead of national and local legislative elections that are due in 2021 but, before the virus, were widely expected to be moved up to later this year. However, Nazarbayeva remains unpopular with much of Kazakhstan’s elite and the wider population, and she may be glad to leave Tokayev in place to deal with the consequences of COVID-19. She also knows that shortcomings in the healthcare system will be blamed primarily on Nazarbayev. After introducing quarantining in mid-March 2020, Tokayev moved to a total lockdown at the end of the month with the immediate priorities of suppressing the rise in cases, supporting the healthcare system and ensuring adequate availability and distribution of food supplies. The government has called up army reservists to provide auxiliary support for health and other services, pledged 250,000 extra jobs during and after the quarantine period, reduced VAT on food items from 12% to 8% until October 2020, and offered tax deferments and other help to small and medium-sized businesses. But providing sufficient liquidity will be a challenge. The economy is particularly vulnerable to the COVID-19 emergency, both because of the impact on the domestic economy but also because of the price collapse in the oil sector, which remains central to the Kazakh economy. Facing a currency collapse and a sharp drop in government revenues, the country has few options as it tries to respond. Its first move has been to cut long-term economic development programmes in order to maintain social protection commitments and roll out emergency stimulus measures. Politics has essentially been put on hold while the government works to develop a strategy, but it is aware of the potential for demonstrations and unrest linked to economic conditions once the immediate impact of the outbreak has passed.
TREND ► OUTLOOK ▼
In recent years, the Kazakh government has made significant efforts to improve the business environment in general, and corporate governance conditions in particular. There have already been some successes for its privatisation strategy, including IPOs for state uranium producer KazAtomProm and Halyk, the country’s largest bank. However, as pressure on the economy forces the government to prioritise employment and social protection over long-term development projects, investors will feel the impact in areas like the localisation of supply chains. Kazakhstan also appears to be on the back foot now as it continues to fight a settlement of 500 million USD awarded against it in 2013 following the nationalisation of assets owned by Moldovan investors. A comprehensive loss in the case would be a reputational blow just as Kazakhstan is seeking investment in its offshore oil and gas fields in the Caspian Sea.
After a lull during Tokayev’s first few months in office, opposition protest activity resumed with numerous demonstrations throughout the first two months of 2020. Relations between opposition groups and the government became particularly tense in February 2020 after the death in custody of a prominent opposition activist, Daniyar Agadil, just hours after his arrest. In February 2020, there was also an unusual ethnic clash between Kazakhs and ethnic Dungans, a separate Muslim minority group, which resulted in ten deaths, considerable destruction of property, and several thousand Dungans fleeing to nearby Kyrgyzstan. While still not a common occurrence, outbursts of Kazakh nationalism have risen in recent years. The economic shocks brought on by the COVID-19 pandemic could lead to greater unrest later in the year if the government is unable to help people weather the economic impact.
TREND ▼ OUTLOOK ►
The government and security services have made considerable efforts to limit the spread of extremist Islamist ideology, which is still considered a threat given the potential to radicalise some of those suffering in the current economic climate. This is a particular concern in small towns in the southern and western regions, which have borne the brunt of a prolonged period of weak economic growth. However, the overall threat of terrorist violence has not increased in recent months.
Kazakhstan’s currency, the tenge, remains vulnerable to the price of oil, which accounts for 45% of the country’s exports. Following the price drop in 2014, the government floated the tenge in order to protect its foreign currency reserves and this resulted in a significant devaluation. Despite the official free float, the central bank has regularly intervened in the currency market to provide support in recent years, causing a considerable drop in reserves. This has limited its ability to provide support during the latest slide that began in March 2020 with the fall in oil prices. With the tenge down by 16% during the first quarter, with almost all of the fall happening during March 2020, the government will continue to strengthen capital controls in the financial sector despite the risk of precipitating further capital flight. The central bank has kept its interest rate at 12% in anticipation of inflation moving quickly through its 6% target ceiling and into double figures. A growing concern for the bank is the likelihood of a sharp rise in non-performing loans throughout the banking system as corporate creditworthiness deteriorates.
In recent years, Kazakhstan has been developing a series of fiscal rules to shield the national budget from volatility in commodity prices. However, with the current budget based on an oil price of 55 USD per barrel, the brief fall to 25 USD in late March 2020 has pushed these to one side. The government has already indicated that it will take out 10 billion USD from the National Fund, which held 60 billion USD at the start of the year, to help cover a budget deficit that is already forecast to be 3.5% of GDP and rising. However, a protracted crisis will quickly undermine long-term growth prospects beyond the contraction now inevitable this year and so raise the requirement for external financing.
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