Kazakhstan - Grace under pressure

Kazakhstan’s economy is suffering from the fall in commodity prices but its long-term future is bright

Kazakhstan has come under pressure in the past year, as the oil price has plummeted and Europe’s relationship with the country’s neighbour Russia has deteriorated, but while it faces undoubted challenges, Kazakhstan’s long-term outlook remains positive.

“Certainly the Kazakh economy is undergoing change, as is inevitable given the decline in the price of oil and metals, which constitute 90% of exports,” explains Saida Djarbolova, head of ING in Kazakhstan. “The most pressing issue is the status of the soft peg between the Kazakh tenge and the US dollar, which has been tested by the weakening of commodity prices and the sharp devaluation of the Russian rouble.” Kazakhstan is a customs union with Russia. The devaluation of the rouble has significantly weakened Kazakhstan’s terms of trade with Russia, which accounts for 33% of its imports and 6% of exports.

Unpegging the currency, which is widely expected, would result in a significant devaluation that would improve the outlook for the economy overall. “It would make Kazakh producers more competitive, especially small producers that compete with Russia companies,” notes Djarbolova. However, devaluation could destabilise parts of the financial sector, which have made US dollar loans to Kazakh companies that have no US dollar income. Equally, consumers would be hard hit as Kazakhstan imports almost all of its food and other needs, which would cost more following devaluation.

The fall in oil and other commodity prices also has a variety of other effects. As the oil industry employs few people directly, employment is unlikely to fall, although there will be some impact on oil services firms and other suppliers.  Similarly, while declining prices have weakened government finances, Kazakhstan has an oil fund that will reduce the need for budget cuts. Moreover, government spending on social programmes is modest (even compared to Russia) and therefore a decline in revenues will have a minor direct impact on citizens.

However, lower government revenues will limit the government’s ability to support the economy. Since the financial crisis the government has taken a leadership role, financing infrastructure development directly and providing support to banks. Both those roles will be curtailed, with likely consequences for unemployment. “While this outlook is definitely challenging, the government has a reputation for prudent and conservative management and will be able to manage the changes required,” says Djarbolova. The European Bank for Reconstruction and Development forecasts that Kazakhstan’s 2015 GDP growth will be 1.5% – avoiding recession – compared to 4.3% in 2014.

 

Looking for new opportunities

In the longer term, the Kazakhstan economy needs to diversify away from natural resources. “Falling oil prices are a wake-up call,” says Djarbolova. “There have been diversification initiatives in the past, but despite pledges of government and tax support, they have achieved little – plans tend to be announced but are then not implemented.” In addition, Kazakhstan suffers from a lack of managerial and technical expertise, which impedes diversification efforts.

What else can be done to boost the economy? Efforts to establish a New Silk Road between Europe and China, while receiving political prominence, are unlikely to have any immediate benefit, according to Djarbolova. “It is questionable whether there is an economic case to build a railroad between Europe and China,” she adds. “Trade always chooses the most efficient route and while the railroad will significantly reduce transit time and could eliminate customs procedures, it is unclear that there is a sufficient demand for perishable goods from China, which will be the chief beneficiary of a shorter route.”

Of more immediate benefit is Kazakhstan’s bid for the 2022 Winter Olympics. “Winning the Olympics would help the country to develop its infrastructure,” says Djarbolova. “Given Kazakhstan’s location, it will never attract significant external tourism but the Olympics could spur internal tourism, which is currently constrained by a lack of facilities: there’s only one international standard ski run in the country, for example.”

 

A careful balancing act

While Kazakhstan is located firmly within Eurasia – it borders Russia and China – the European Union has been keen to build relations with the country. In January, the EU-Kazakhstan Enhanced Partnership and Cooperation Agreement was signed, facilitating stronger political and economic relations between Kazakhstan and the EU.  It is intended to increase the flow of trade, services and investment between the parties and contribute to Kazakhstan's political and social development.

“The new agreement does not necessary signal a change in strategy by Kazakhstan,” explains Djarbolova. “Given its location, the country must maintain good relations with many countries and one of the hallmarks of President Nursultan Nazarbayev is his ability to be a strong friend to the US, the EU, Russia and China simultaneously – it’s a great balancing act.” Similarly, while the West has condemned Russian actions in Ukraine in the past year, Kazakhstan – while being one of the first countries to recognise the Ukrainian government – has managed to avoid any disagreement with either Russia or Europe and the US.

In the long term, Kazakhstan’s outlook remains optimistic, despite the current challenges. “The country has excellent resources, and an educated small population, which is peaceful and has no community tensions,” says Djarbolova. “It remains a young country that is still finding its identity in the post-Soviet era. But given the opportunities available, it is certain that Kazakhstan will find both an identity and a role in the wider world.”