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Country Commercial Guides
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CHAPTER II. ECONOMIC TRENDS AND OUTLOOK
A. Major Trends and Outlook
Prices for Kazakhstan's leading exported commodities (oil, metals, and grain) all dropped markedly in 1997 and 1998, resulting in a significant, protracted decline in government revenues. GDP shrank 2.5% in 1998; this downward trend continued into 1999. Increased prices for Kazakhstani commodity exports as well as the positive effects of an April devaluation led to an upturn in growth during the third quarter of 1999 that the government predicts will lead to GDP growth of 0.6% for the year. The Asian economic crisis and Russia's financial woes have dampened the enthusiasm of international investors for Kazakhstan, as for other developing markets. In addition, on-going construction costs for the new capital in Astana have increased budgetary pressures.
Kazakhstan's monetary policy has been fairly successful, both in bringing down inflation--just 1.9% in 1998--and in strengthening the banking sector. However, due in part to the effects of the Russian financial crisis of 1998, the government was forced to float the national currency, the tenge, in April 1999. It successfully managed a de facto 30-percent devaluation, which eased pressure on foreign exchange reserves and has stimulated exports. Inflation jumped to over 15% in the months following the devaluation, but the upward trend has since been arrested and is expected to total about 16% for the year as a whole. Kazakhstan reached agreement with the International Monetary Fund (IMF) in late 1999 on a three-year economic program, supported by IMF credits. The program and IMF support will help Kazakhstan continue its relatively successful macroeconomic adjustment.
The current economic climate for investment in Kazakhstan has been clouded by the Russian debt default in August 1998. Kazakhstan has suffered from a downgrading of its sovereign and corporate debt ratings, as have many emerging markets. Independent assessments by the main credit agencies Moody's and Standard & Poor (S&P) reflect a worsening economic climate in 1998 and 1999. In September 1998 S&P reduced the rating of long-term debt from BB- to B+ and long-term debt in tenge from BB+ to BB-. Short-term debt in foreign currency and Tenge was left unchanged at B. According to S&P methodology, the rate of BB- indicates a level of inflation of 25-100%. Moody's reduced the credit rating of foreign currency debt from a level of Ba3 to B1 in early 1999. In addition, it reduced the rating for bank deposits in foreign currency from B1 to B2, and the corporate rating of the Kazakhstan Electricity Grid Operating Company (KEGOC), a natural monopoly electricity distributor, from Ba3 to B1.
Kazakhstan has experienced high costs in its transition to a market economy since the breakup of the Soviet Union in 1991. By early 1999, real GDP and wages were less than two-thirds of their 1991 levels. With the exception of the second half of 1998 and the first half of 1999, output has been increasing since 1996, when a steep decline bottomed out.
Kazakhstan expects oil production (including gas condensate) for 1999 to total about 30 million metric tons, a 15% increase over 1998 (25.93 million tons, up from 25.77 million tons in 1997). Actual production for the first 11 months of the year was 27.4 million metric tons. Kazakhstan exported nearly 17 million tons of oil in 1998. Natural gas production was 1.6% higher in 1998 than in 1997. Increasing oil prices in 1999 provided a welcome respite after significantly lower than expected earnings in 1998.
The vast majority of Kazakhstan's onshore oil production has been privatized and there has been no significant oil privatization activity since the end of 1997. However, the government still intends to sell some shares in several privatized oil companies in 1999 and 2000 through Kazakhstan's stock market. In September 1998, Philips Petroleum (U.S.) and Inpex (Japan) each acquired half of the Kazakhstani government's one-seventh stake in the potentially lucrative Offshore Kazakhstan International Operating Company (OKIOC), an international consortium that will explore and develop Kazakhstan's offshore Caspian region. In 1998 and 1999, Kazakhstan negotiated an increase in its quota for Kazakhstani oil exports through Russia to seven million tons per year. In May 1999, the state oil company, Kazakhoil, purchased an additional 45-percent share of the Atyrau refinery (previously held by a Swiss firm) for $10 million and took over management of the refinery.
Kazakhstan's metals sector also was adversely affected by low world commodity prices during 1998 and early 1999. Decreased demand from its major East Asian markets during the same time period also hurt Kazakhstan's iron and steel sector, dominated by the giant ISPAT-KARMET steel mill in Karaganda. The subsequent rebound in some metals prices and growth in East Asian demand during the second half of 1999 has mitigated some of this damage.
The Kazakhstani government is locked in a legal battle with Trans World Metals, a London-based trading company, over ownership of the Sokolovsky operation and three other metals factories. By summer 1999, it was unclear what effect the dispute would have on investment in Kazakhstan's metals sector.
Swarms of locusts descended upon Kazakhstani farmland in summer 1999. Nonetheless, despite the locust infestation, the 1999 harvest was far more plentiful than 1998's disastrous harvest. Kazakhstan harvested 15.9 million tons of grain, including 12.5 million tons of wheat, in 1999. It remains to be seen what impact the infestation will have on the 2000 crop. In 1998, Kazakhstan harvested only 6.4 million tons of grain, a 50-percent decrease from the 1997 harvest of 12.2 million tons. The record-low harvest came after a strong summer drought that destroyed about 2 million hectares of grain areas. Moreover, wheat prices were only $80 per ton, compared to $150 per ton in 1997.
In the fall of 1999, Kazakhstan reached an agreement in principle with the IMF on a new Extended Fund Facility program, which was approved by the IMF Board of Directors in December 1999. Kazakhstan's efforts to stick to a realistic government budget will be key to the success of the IMF-supported economic program. Given the devaluation of the Tenge, the rebound of oil and minerals prices and the recovery of exports, the government expects that revenues will come closer to target levels in the second half of 1999. Kazakhstan's revenue from taxes is extremely low by world standards--only 12% of GDP in 1998. Government efforts to increase tax collections, with the exception of customs collections, have been largely unsuccessful. Kazakhstan's Ministry of State Revenues has set up an electronic monitoring system of about 200 of the country's major enterprises, which encompasses most major U.S. investors in Kazakhstan. Tax inspections of domestic and foreign companies are expected to increase.
Kazakhstan instituted an ambitious pension reform program in January 1998. Early problems with computer software have been overcome, and by mid-1999, contributors were placing more money in privately managed investment funds than in the State-run equivalent. President Nazarbayev has pledged his strong support for the project. The Kazakhstan Stock Exchange, in which the government hopes the majority of pension funds will go, has been largely inactive since its founding in September 1996. Most enterprises lack proper accounting records that would enable them to sell stock via the stock market. These factors have delayed the issuing of shares of five or six "blue chip" companies, which experts believe would invigorate the Kazakhstan Stock Exchange. For the time being, pension fund capital is being invested almost exclusively in government bonds.
In November 1998, Kazakhstan for the first time drew on its U.S. $400-440 million IMF Extended Fund Facility (EFF) in its ultimately unsuccessful efforts to defend the tenge from pressure for devaluation. While the April 1999 devaluation sparked an inflationary burst, the government expects to limit inflation to no more than 16% in 1999. The National Bank has continued its campaign of consolidating and strengthening the banking sector. As of July 1999, the number of banks in the country stood at 69, down from 76 in December 1998, and 100 at the start of 1997. Bad loans comprised just over 6% of banks' portfolios, which is close to international standards. State-owned Turan-Alem, one of the country's largest banks, was sold to a consortium of local investors in March 1998. At the same time the government sold 18% of its shares in Halyk Savings Bank, Kazakhstan's largest bank in terms of deposits. The government intends to lower its stake in Halyk to a minority interest by 2001. Several major foreign banks have branches in Kazakhstan, including ABN-AMRO, Citibank, and Societe Generale.
While the official unemployment rate is low, actual unemployment is estimated at 15%. This is somewhat mitigated, however, by an active gray market economy. The government has become increasingly concerned over the unemployment issue and has made it clear to U.S. and other foreign firms that, as much as possible, they should hire Kazakhstanis.
In the next several years, GDP growth will depend greatly on commodity prices, particularly the price of oil. Oil discoveries under Kazakhstan's portion of the Caspian seabed (the first exploratory well was being drilled as of late summer 1999) also will be an important factor. Major finds would spur a new surge of foreign investment. However, without a return to the level of mid-1997 oil prices (and if offshore discoveries prove disappointing), the rate of GDP growth will likely remain quite low until new export routes enable Kazakhstan to boost significantly its onshore oil production. Overall, Kazakhstan needs to diversify its economy away from a reliance on natural resources to protect itself from future shocks in oil and other commodity markets. Kazakhstan has found its manufacturing sector affected by competitive devaluation in Russia, Uzbekistan, and the Kyrgyz Republic.
After the April 1999 devaluation, Kazakhstan introduced--and subsequently rescinded--a tax of one percent on the value of any transaction to purchase hard currency. Rumors persist that income derived from investments in Government securities may also be considered taxable income under profits tax changes (it is presently exempt under Article 34(3) of the Tax Code).
B. Principal Growth Sectors
Natural resources, principally oil and gas, dominate the Kazakhstani economy. Kazakhstan has proven reserves of 16 billion barrels of oil. Government estimates of potential oil reserves under Kazakhstan's portion of the Caspian vary widely. A conservative government estimate is that 30 billion barrels may lie offshore under the Caspian seabed. In addition, Kazakhstan has approximately two trillion cubic meters in proven natural gas reserves, with a high likelihood of significant additional gas deposits under the Caspian. Western interest in Kazakhstan's oil and gas sector is significant and the scale of contemplated projects is enormous. These projects would offer major opportunities for U.S. investment and trade.
Kazakhstan's electrical power sector, currently running at just over half its installed capacity of 17,000 megawatts, is another area of projected growth. The Kazakhstani government is keenly interested in attracting new investment to ensure adequate electricity to support Kazakhstan's recovering economy.
Although Kazakhstan's mineral resources of ferrous and non-ferrous metals hold great promise, several high-profile investment disputes have hampered development of Kazakhstan's metals sector. A Canadian firm brought suit against the Kazakhstani government for more than $200 million, because the government reneged on its commitment to provide export licenses. The Kazakhstani government is engaged in a legal battle with another foreign firm over control of four major mining and metallurgical plants. More than anything else, however, the slump in metals prices has driven investors elsewhere. Once prices recover, significant opportunities in Kazakhstan's mining and metallurgical industries could lure new investment and lead to growth in this sector.
C. Government Role in the Economy
The Kazakhstani government, especially the President's office, takes a leading role in directing national economic development. Many major policies governing the economy have been issued as decrees from the President's office.
As of the summer of 1999, the vast majority of all small and medium-sized enterprises had been privatized, along with most large-scale state companies. Nearly all of Kazakhstan's major state oil companies are now privately controlled. The same is true of its mining and metallurgical enterprises. Many important assets still remain in state hands, although the government is seeking to renew its privatization program. Likely sales--the so-called "blue chip privatization program"--in the near future include some of the government's shares in now privately managed oil and metals companies.
In June 1999, the government submitted to Parliament a bill that would privatize agricultural land. (Agricultural land currently cannot be owned, although it can be leased for up to 99 years). The privatization program envisioned in the bill would be enacted in stages, starting with the sale of abandoned land and land held in reserve by the state. Land currently leased would be sold after that. Only Kazakhstanis born in Kazakhstan would be allowed to own agricultural land. Due to opposition, the bill was withdrawn from Parliament in late 1999, but the government is expected to re-submit it in modified form.
D. Balance of Payments Situation
Kazakhstan has run a trade deficit since 1992. Kazakhstan's ambitious investment program has led to substantial capital inflows from abroad, much of which finances the import of capital equipment. Moreover, demand for imported consumer goods is growing. These trends are likely to continue and keep Kazakhstan's trade balance negative in the near term. Because the country lacks proper international trade statistics, trade figures are only approximations. According to Kazakhstan's National Bank, the 1998 current account deficit was roughly $1.25 billion, or 5.6% of GDP. By way of comparison, the 1997 current account deficit was $952 million, or 4.2% of GDP. Kazakhstan's 1998 trade deficit was roughly $800 million - up from $385 million in 1997.
In the second half of 1998, Kazakhstan's imports from Russia grew by 40% as a result of the Russian devaluation of the ruble. Imports decreased, however, in the first two quarters of 1999 after the introduction a six-month import ban on selected Russian-made products and 200-percent import tariffs on some Kyrgyz and Uzbek goods in February 1999. The April 1999 tenge devaluation increased Kazakhstani exports by making the price of Kazakhstani-made products more competitive. The devaluation, along with increased world market prices for oil and minerals, Kazakhstan's principal exports, successfully reduced what was a dramatically growing trade deficit. As of November 1999, net international reserves of the National Bank of Kazakhstan stood at approximately $1.285 million, sufficient for three months' worth of imports.
In 1998, Kazakhstan failed to meet its foreign direct investment target by almost 50%, attracting only $700 million in foreign direct investment (FDI). This was significantly lower than $1.3 billion in 1997, according to the Agency for Investment. However, as of the third quarter of 1999, Kazakhstan had attracted more than $8.3 billion in FDI--most of which is in
the oil and gas sector--since its independence in 1991. Most foreign direct investment comes from Western investors and South Korea. The $2.08 billion invested by U.S. companies makes the United States the largest single source of investment in Kazakhstan.
E. Infrastructure
Kazakhstan's geographical position--landlocked in the center of Eurasia--makes it dependent on transport links through neighboring countries to deliver its goods to world markets. Kazakhstan's railroad system is linked to Europe via Russia, to the Persian Gulf via Iran, and to the Pacific Rim via China and Russia. The European Bank for Reconstruction and Development (EBRD) financed recent improvements to the Caspian Seaport of Aktau, from where oil and other goods are shipped across the Caspian. Regular flights connect Kazakhstan with Europe and some Asian countries. In 1999, five major carriers (Austrian Airlines, British Airways, KLM, Lufthansa, and Turkish Airlines) operated non-stop flights to Almaty, although Austrian Air ended its operations in Kazakhstan at year's end.
Kazakhstan's government-run railroads are poorly funded and, consequently, in very weak financial condition. The three state railroad companies were merged into one national company in January 1997. A paved road network connects all major cities. However, lack of funds since the collapse of the Soviet Union in 1991 has left most roads in a state of disrepair. The Asian Development Bank (ADB), EBRD, and the Islamic Development Bank (IDB) are jointly funding a $284 million highway rehabilitation project connecting the commercial center, Almaty, with the new capital city, Astana. U.S. companies should monitor infrastructure tenders supported by international financial institutions to identify potential business opportunities.
Transportation network statistics:
Railroads--17,700 kilometers
Roads (paved)--87,337 kilometers
Navigable waterways--4,000 kilometers
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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