Thursday, September 30, 2010

Kazakhstan continues economic recovery

Kazakhstan continues economic recovery
By Robert M Cutler

MONTREAL - Kazakhstan's economy has responded strongly to the return of international demand for its energy, mining and manufacturing exports, growing at an 8% rate during the first half from the equivalent period in 2009. That is helping to fuel optimism that Astana looks like weathering the global financial crisis in much better shape than many other countries.

President Nursultan Nazarbayev's most recent ministerial shake-up appears likely to improve government bureaucracy, while state finances should continue to improve as a higher export duty on crude oil comes into force next year. The currency, the tenge, is strengthening after an 18% devaluation in February 2009, and measures taken over the past two years to restructure the banking system appear to be bearing fruit.

True, growth is easing off from the first six months this year, and is likely to be more in the 5% range for the full 12 months. Still, that is up from the 4% previously expected by the government, with industrial production increasing 7.5% year-on-year to
account for much of the unexpected expansion. Gross domestic product (GDP) rose 1.2% last year, and 3.2% in 2008, after averaging nearly 10% annual growth over the previous decade.

Going forward, the government has reduced its growth forecast for 2011 to 3.1% from 4%, picking up to 3.3% and 3.5% over the following two years, all based on the assumption of an average oil price of $65 per barrel.

The tenge has since risen to about 146 to the US dollar since February, when the central bank set a tenge-per-dollar band of 145-155, widening the trading range to 127.5-165 eight months ago. The
financial authorities are expected to allow it to appreciate further, perhaps to 140 by the end of this year, to counteract an expected rise in food prices due to drought and fires that affected Kazakhstan as well as Russia this summer.

Support for and restructuring of the banking sector, statutorily limiting creditors' prerogatives, seems to be bearing fruit. The International Monetary Fund July 2010 "Article IV Consultation", however, warns of a "large and increasing stock of non-performing loans" and points to the need for a "transparent and comprehensive strategy to resolve bad debts".

Last year, BTA Bank, Alliance Bank, Astana Finance and Temirbank (the last of these then controlled by BTA) defaulted, necessitating restructuring of about $20 billion of debt. Through the first seven months of this year, only BTA Bank and ATF Bank posted losses ($540 million and $108 million, respectively), while other banks broke even or posted profits. The ATF statistic would have been worse but for a $208 million goodwill writedown by its Italian parent, UniCredit, in the second quarter.

By June this year, Halyk Savings Bank had accumulated sufficient additional liquidity to repay to the state-owned Samruk-Kazyna fund a
loan of $409 million, 18 months before it was due.

banking sector will not finish restructuring until sometime next year at the earliest.. Credit will not proliferate before then and it may be a considerable time before it returns to the levels immediately preceding the global financial crisis, when increasing credit drove economic growth.

Starting in January, Kazakhstan will double its export duty on crude oil to $5.40 per barrel (actually $40 per ton, using for conversion the standard 7.4 barrels per ton, although the figure varies according to the density of the oil). Foreign observers are predictably emitting protests and cautions, but this is only one-fifth of the duty that was in force through January 2009, when it was abolished to assist producers during the financial crisis.

Hydrocarbon revenues will thus increase, but new
investment will be on hold until the new government Energy Ministry makes clear what reforms and policies it intends to implement. In March, a new Ministry of Oil and Gas was split from the old Ministry of Energy and Natural Resources and will assume regulatory functions previously exercised by KazMunaiGaz, which became a purely commercial entity. Sauat Mynbaev, who led the Old Ministry, was appointed to head the new one.

Mynbaev was a key player in forcing the consortium developing Kashagan oil deposits to renegotiate its agreement with the government, and he is playing the same role with respect to the Karachaganak gas field. (See
Kazakhstan announces new energy directions, Asia Times Online, February 13, 2008; and Kazakhs tighten grip on Karachaganak, Asia Times Online, March 5, 2010.)
At the same time, the Ministry of Economy and
Budget Planning was renamed the Ministry of Economic Development and Trade, absorbing part of the function of the Ministry of Industry and Trade (which became the Ministry of Industry and New Technologies) while its own budget planning function was transferred to the Ministry of Finance.

Nazarbayev is famous for his continual reorganizations of the Kazakhstan government bureaucracy, often for administrative and sometimes for political reasons, but this latest cycle looks like a fairly well thought-out rationalization of the division of labor that could streamline or at least ameliorate the state administration.

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