Kazakhstan shows robustness

Oct 06. Asia Times

By Robert M Cutler

Kazakhstan shows robustnessAs much of the global economy wobbles with uncertainty, Kazakhstan is maintaining robust growth, expanding at 7.1% over the past six months from a year earlier. At the same time, inflation is falling and foreign investors are pouring in money.

While growth is down from the 7.3% pace of the 12 months to last December, it is faster than the 6.5% year-on-year expansion in the first quarter of 2011. The performance, due in large part to the recovery of the world oil price, is expected to stabilize during the rest of 2011 and into 2012. Earlier this year, the state statistics agency forecast full-year 2011 growth of 4.5%, but it now looks like leveling off at around an average of 6.7%.

Growth in 2010 was driven by increased industrial production particularly in the natural-resource and commodity sectors, but by the second half of the year higher wages had begun to drive domestic consumption of both domestic and imported goods upwards.

Unemployment is under 6%, and analysts expect bank lending and wages to increase still more. This will give a further impulse to domestic consumption and therefore production for the home market. The consensus estimate for growth in Kazakhstan’s gross domestic product (GDP) in 2012 is about 6.5%.

At the same time the inflation rate, which had been rising for nearly a year, declined in September to 8.7% year-on-year, down from 9% in August, with September’s increase over August 2011 limited to a modest 0.3%. Analysts attribute the deceleration in inflation to a good grain harvest, estimated at 25 million tonnes, exerting downward pressure on prices.

Year-on-year inflation in food prices (which account for 40% of household spending in Kazakhstan) dropped to 12% from 12.8% while inflation in non-food goods was down slightly to 5.6% and remained at a constant 7.7% in the service sector. Current forecasts project overall inflation to remain in the range from 6% to 8% over the next several years.

The National Bank of Kazakhstan in February 2009 during the global credit crisis and economic slowdown devalued the tenge, the national currency, by 20% and introduced a “corridor” of 125-165 tenge to the US dollar as its target exchange rate. At the beginning of March this year, it abolished that corridor and returned to a “managed free float”, allowing the currency to strengthen on the back of the country’s continued economic resilience and absorb some of the price increases that would otherwise have occurred.

On Thursday, the tenge was stable at 148.3 to the dollar, having weakened from 144.7 in early April, moving in a range from 143.4 to 150.

Foreign direct investment (FDI) reached US$17.4 billion in 2010, a figure that looks likely to be exceeded this year. It is concentrated in natural resource exploration and development, but the government is making a strong effort to go beyond oil and gas. The country has long been known to be a virtual periodic table of elements. The problems have been to develop the deposits and get them to market in a commercially viable manner.

The state is now seeking to form strategic partnerships for exploration and development of uranium and rare-earth metals. Industrial metals such as copper and zinc are also on tap. For example, the world mining giant Rio Tinto earlier this year signed an agreement to form a mining joint venture with state-owned Tau-Ken Samruk, and other companies from developed capitalist economies have been lining up to try to negotiate deals.

Gold is another metal that will benefit from increased investment from both domestic and international sources. The National Bank of Kazakhstan announced plans in August to restock its own gold reserves by buying all the refined gold that the country can produce, beginning in early 2012. Kazakhstan is already one of the world’s largest gold producers, ranking seventh in global gold reserves with 4% of the world total.

Recent agreements with China, which already accounts for 40% of Kazakhstan’s total exports, and with South Korea will draw significant FDI into the country, ramping up through at least the middle of the decade. Outside of energy, mining, and mineral resources, the government is also seeking to develop the agricultural sector still further.

Such diversification is necessary because of the threat of another decline in volatile world oil prices. Sectors such as manufacturing, construction, real estate and some services do not benefit directly from the hydrocarbon sector investment, so the government is seeking to boost them. Thus for the years 2011-2014, government spending on infrastructure is planned to the amount of $44.6 billion.

That sum is available partly from a new credit line opened by Beijing as part of a recently signed package of new strategic economic cooperation, and also from the country’s stabilization fund, the National Fund of the Republic of Kazakhstan, which has benefited from the recovery in world oil prices, as nearly 50% of government revenues are drawn from the extraction and export of oil.

The country’s stabilization fund currently holds almost $40 billion, nearly twice its level of a year ago, and it may easily reach $50 billion by the end of next year. All this largesse has helped to cushion a national banking sector that still has its problems, with non-performing loans having peaked at almost 40%.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.