Previous Quarterly Editions
Expropriation Risk: 62 60 58 56 Political Violence Risk: 37 38 38 38 Terrorism Risk: 33 33 33 33 Exchange Transfer and Trade Sanction Risk: 63 64 62 63 Sovereign Default Risk: 37 37 37 37
TREND ► OUTLOOK ►
Growth is expected to be around 3.7% this year, helped by higher oil prices and strengthening domestic demand. Retail sales have been surging as both inflation and unemployment fall. However, this would be below the 4% growth achieved last year and the trend is likely to continue downwards in the next two years as fiscal consolidation constrains economic activity. The fiscal position should improve over the same period and be in surplus by 2020. To help strengthen the economy with greater foreign investment, bonds and central bank notes can now be cleared through Clearstream, the international central securities depository. This is a major step for capital market development in Kazakhstan and it should increase investment opportunities as part of its role in China’s Belt and Road Initiative. In addition, in July President Nazarbayev opened the new Astana International Finance Centre (AIFC), a special economic zone for financial services with incentives that include its own court and arbitration centre staffed with British judges and barristers. Its aim is to attract a broad array of new investors into the country from the Middle East, Asia and Europe. The government needs more investment to help meet ambitious social goals that include greater access to affordable housing and higher education as well as more financing for small businesses. A new tax regime for the extractive industries sector is designed to encourage greater exploration, and the government has made regulatory changes to attract interest in the renewable energy sector that it hopes will provide 10% of the country’s power by 2030. Agriculture is doing well as exports to China increase and new sales of high value cattle to the Middle East look sustainable. The 78-year old President Nazarbayev, whose current term lasts until 2020, has still to unveil clear transition plans for when he leaves office. This remains a central concern both at home and abroad as earlier pledges to devolve more presidential power to the legislative have made little progress. Even if he chooses not to run again in 2020, the widespread assumption is that he would retain an overarching role in government policy. A recent strengthening of the powers held by the Security Council, of which he was made chairman for life at the end of last year, suggests that this may offer a position from which Nazarbayev could continue to have a presence in executive decision-making after stepping down from the presidency. Under the new laws, the 12-member council coordinates the country’s law enforcement and security agencies and will screen the candidates for all significant government posts, including regional and city government.
TREND ▼ OUTLOOK ►
Because slowing growth is increasingly the result of a more effective fiscal policy, it will be less of a concern for investors. However, the extent of corruption in state institutions and the weak legal protection for foreign companies continue to act as disincentives, as does the prospect of policy shifts that could result from a post-Nazarbayev power struggle. This will make it hard for the government to make quick progress with its plans to raise 70 billion dollars from the privatisation of state assets. However, although it is now making a strong push to sell at least 25% of KazAtomProm, which supplies 40% of global uranium demand, and part of Air Astana, which is the largest Central Asian carrier. As part of the efforts to reduce the deficit, more emphasis is likely to be put on developing public private partnerships.
TREND ► OUTLOOK ▲
Last year’s strikes in the mining sector are among the factors that have prompted the government’s new social initiatives to improve living standards. These include a reduction in the tax rate for low-paid workers from 10% to 1%. However, concern about further industrial unrest has also seen the introduction of a broad criminal charge of inciting discord that is targeted at labour activists, among others. Tighter controls on social media have also been introduced to limit its use as a platform for discussion, and the government still has the option to enforce a 2016 amendment to the communications law that would require all internet users to install a 'national security certificate' on their devices.
Kazakhstan adopted a five-year state programme against extremism in 2018 that includes wider training in how to respond to terrorist events and a greater emphasis on deradicalisation. Together with efforts to strengthen the Central Asian response to radicalism, the government is also increasing cooperation with both the EU and Russia in countering radical ideologies. It already requires websites to register every user who wishes to post a comment. Central Asia has become an active area for the recruitment of Islamist extremists in recent years and this looks likely to remain the case for the medium term.
TREND ▲ OUTLOOK ►
The prospect of the Russian economy weakening further under sanctions is a concern for Kazakhstan, as Russian banks provide financing for major infrastructure projects in the energy sector. The tenge came close to a three-year low against the dollar in August as it followed the rouble downwards, and the central bank is preparing to defend the currency if it falls much further. Efforts to expand trade with China and, more recently, to offer financial services in Uzbekistan should help in the medium term. Despite the consolidation underway in the domestic banking sector, non-performing loans remain a significant problem. The central bank has continued its gradual reduction in interest rates, which have now fallen to 9%.
As part of the consolidation needed to tackle a fiscal deficit that reached 7.7% of GDP last year, transfers to the central budget from the National Fund, which is fed by oil revenues, are being reduced. The government is considering the issuance of a tenge-denominated Eurobond that would be intended to demonstrate the country’s attractiveness to investors. Despite rising slightly over the last two years, the debt to GDP ratio should be no more than 22% in 2018 and the country’s substantial sovereign wealth fund shields it from sovereign default risk.
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