Key indicators show Kazakh economy on track

October 18. Central Asia newswire

By Hal Foster

Key indicators show Kazakh economy on trackKazakhstan officials have been cautious this year in characterizing the strength of the economic recovery.

They’ve wanted to be on the conservative side so that if the recovery lost steam, the public and business community couldn’t accuse them of painting an overly rosy picture.

As each week goes by, however, there are more signs that the economy is roaring again.

There are problems, to be sure. Two of the major problems are Inflation of 6 to 8 percent and billions of dollars in bad loans continuing to weigh down banks.

But the positives outweigh the negatives.

The signs that the economy is rebounding include both statistics and anecdotal evidence. Here are a few examples:

– Economic growth has hovered between 7.6 percent and 8 percent this year.

– A national compensation survey indicates that many employers plan to hire more staff, raise wages and restore bonuses.

– The prices of two mainstays of the economy, oil and minerals, are up.

– Kazakhstan is enjoying a surge in exports and a fall in imports.

– The Hong Kong Stock Exchange plans to list the shares of Kazakhstan companies, an arrangement that would provide enterprises with capital for expansion.

– An internationally renowned emerging-markets guru has pronounced Kazakhstan one of the top two places he would invest in the developing world.

Half year GDP growth beats expectations, companies hiring

At the start of 2010, Kazakhstan officials were very cautious when forecasting the most important measure of economic prowess: growth in gross domestic product.

The country had come off paltry 1.4 percent growth in GDP in 2009, and it seemed prudent to play it conservative. The first GDP prediction for 2010 was 2.4 percent expansion.

First-quarter results tripled expectations, however, coming in at 7.6 percent growth. The first half figure was even better – 8 percent – and the nine-month figure almost as good – 7.9 percent.

Officials have bumped their growth prediction for the year up to 5 percent, but it’s clearly going to be higher than that, barring unforeseen circumstances.

If the economy maintains its 8 percent pace, it will have bounced back almost to the high-flying days of 10 percent growth from 2000 to 2007.

Meanwhile, the business consultant Ernst & Young’s Kazakhstan office says 39 percent of 91 companies it surveyed say they will add employees next year. Only 17 percent of the firms plan to cut staff, with 44 percent saying they’ll keep head count the same.

The results are a quantum leap over the economic-slump years of 2008 and 2009, when many companies laid off workers.

Another slice of the Ernst & Young survey indicating that businesses are more optimistic is that 74 percent plan pay raises of 11 to 12 percent next year.

In addition, the consulting company said, twice as many companies have given performance bonuses of at least a month’s pay this year as in 2009. It didn’t specify the number.

Strong commodity prices fund economic expansion

As for commodities prices, a barrel of oil is fetching about twice as much – around $80 – as it did in January 2009.

And the prices of most minerals have jumped. Copper, for example, has nearly tripled from about $1.30 a pound in February 2009 to $3.80 today.

International economists have predicted that oil and minerals prices will remain stable or increase as the world continues to emerge from the economic downturn.

The price rises have prompted companies such as the iron maker Arcelor Mittal Kazakhstan, the copper producer Kazakhmys and the broad-based resources giant Eurasian Natural Resources Corporation (ENRC) to reopen or expand operations, creating jobs that further bolster the economy.

Higher resource prices have also generated more tax money for the government, part of which has been used to finance President Nursultan Nazarbayev’s ambitious industrialization program.

Nazarbayev has been exhorting Kazakhstan companies to produce more goods for export, and recent news on the export front has been good.

The value of exports surged 52.3 percent in the first eight months of 2010 to $38.4 billion, according to Trade Minister Zhanar Aytzhanova. The value of imports, meanwhile, fell 7.2 percent to $16.6 billion.

Aytzhanova attributed the results to higher commodities prices and growth in export-focused industries.

A favorable balance of trade provides a country with additional money for economic expansion.

Kazakh companies to list on Hong Kong exchange

Financing can be a key to economic growth, of course, and there was positive news about that arena last week.

Prime Minister Karim Massimov, visiting Singapore and Hong Kong, announced that the Hong Kong Stock Exchange will list Kazakhstan companies.

Initial public offerings of shares on the London Stock Exchange have allowed several big Kazakhstan companies – including Kazakhmys and ENRC – to obtain money for expansion. ENRC’s London listing, for example, helped it become a truly global company, acquiring properties in Africa and Brazil.

Hong Kong’s stock exchange, riding the cresting wave of the Chinese economy, will give Kazakhstan companies another important venue for capital to update old facilities, build new ones and add product lines.

Key stock analyst recommends investing in Kazakhstan

Some might consider a bit whimsical another sign that Kazakhstan is regaining its economic legs: The country is on a stock-picking guru’s list of best bets.

But Mark Mobius isn’t your average emerging-markets prognosticator. The Warren Buffett of developing-country investors has a worldwide reputation for shrewd frontier-markets stock picks.

The American-born naturalized German, who has a Ph.D. from the Massachusetts Institute of Technology, is considered the pioneer in emerging-markets investing.

So when he recommends sinking money into a country, investors around the world listen.

The countries at the top of his emerging-markets list these days are Kazakhstan and Nigeria.

In fact, the manager of the Templeton Asset Management Fund in the United States said he’s already invested some of the fund’s money in Kazakhmys and state-owned KazMunaiGas.

He said he expects the emerging-markets portion of the Templeton fund “to grow faster than the rest of the fund.”

Inflation, soft banking sector could dampen recovery

Inflation is one of the statistics that dampens the enthusiasm of some Kazakh watchers.

It reached a devastating 18.8 percent in 2007, plunged to 9.5 percent as the economy drooped in 2008 and slid to 6.2 percent in 2009.

Grigoriy Marchenko, governor of the National Bank of Kazakhstan, predicted in January that it would be in a range of 6 to 8 percent this year – and that’s where it’s stayed.

A year-end figure at the top end of the range or beyond would vex economists because they know that sizzling price increases rob consumers of purchasing power.

The government has been particularly sensitive about increases in food prices this year. It has stepped in quickly when it’s seen localized jumps in the price of bread, flour and pastry products – and prices have fallen back.

Another economic worry besides inflation is continuing softness in the banking sector.

There are signs that a turnaround is occurring. The amount of debt that Kazakhstan banks owe overseas financial institutions has plunged 20 percent to $20.5 billion from $25.6 billion on January 1.

Borrowing too much money from abroad is what got Kazakhstan’s banks into trouble. They took out tens of billions of dollars in loans in the United States and Europe at low interest rates, then relent the money to domestic borrowers at much higher rates.

When the economy tanked in 2008, many borrowers were unable to repay their loans, making it difficult for banks to repay their international debt.

While banks are reducing their international debt, they’re seeing their bad loans continue to rise. The bad-loans total was $9.14 billion in July 2009, $13.60 billion in January 2010 and $15.36 billion in July of this year.

It will take another year for the cumulative figure to begin dropping, many experts say.

The government has been prodding banks to lend more to help the economic recovery pick up steam, but many have held back, fearing getting burned again.

One that has bucked the trend is Eurasian Bank.

“Although we continue to have concerns about the banking sector on the whole, we are comforted by the progress in the over-all economy and the fact that liquidity (day-to-day working capital) has returned,” said Eurasian Chairman Michael Eggleton. “Our bank continues to grow our loan portfolio on the back of these positive risk dynamics.”

In addition to loaning to natural-resources companies, Eurasian has been focusing its lending “in the transport and agricultural sectors,” Eggleton said.

He praised the government for taking steps that encourage lending.

In particular, he said, “the government has done a nice job of reducing the risks associated with loaning to small- and medium-sized enterprises and other critical components in the economy.”