Kazakhstan in macro-trends: the middle of the road

Is it true that Kazakhstan’s economy has withstood – at a price, that is – the world economic slump in terms of national prosperity? Results over the first three quarters of 2009 as publicised in early November this year look middle-of-the-road at first glance. However, Kazakhstan has always faced, and will continue to face, certain problems in comparison with other former Soviet republics which the global economic setback’s wake-up call has not eliminated let alone reversed. Getting more facts and figures under the microscope is not a solution in itself, but it does seem to be a requirement leading to eventual ways out of the downward spiral.

by Charles van der Leeuw, KZW senior contributor

Kazakhstan in macro-trends: the middle of the roadAccording to figures presented in early November by the CIS Interstate Statistics Committee, the Moscow-based department of the Commonwealth of Independent State in which all former Soviet republics except for the Baltic states are taking part (with Georgia on its way out), Kazakhstan’s economy contracted by 3.2 per cent year-on-year over the first nine months of 2009, as compared with a 4.5 per cent on-year loss in the first quarter and a 4.1 per cent one in the first half of the year. It means that the overall trend of economic contraction, which started in fall 2008, is marginally improving but certainly not substantially. This in turn means that measures taken by the government to keep the financial implosion at bay may well have prevented the worst from happening but so far it has not led to any significant reversal of the setback.

In the third week of October, Interfax quoted state officials as raising hopes that the current year will be flat at worst for Kazakhstan in terms of overall economic growth. But voices differ. The news agency quoted economy and budget minister Bakhyt Sultanov as stating that Kazakhstan’s gross domestic product grew by 1.5 per cent on-quarter during the third quarter of this year. In earlier reports, Sultanov had been quoted as expecting a 3 per cent on-quarter growth in the last three months of 2009. According to his calculation, this will result in an overall growth of 0.1 per cent through the year – in line with the lower end of the National Bank’s forecast of between 0.1 and 0.3 per cent. Sideliners such as the International Monetary Fund and the European Bank for Reconstruction and Development expect contractions in the order of 2 and 1.3 per cent respectively.

By comparison, other CIS member states (with the exception of Georgia and Turkmenistan both of which fail to report) show trends that go in different directions and to different proportions. Thus, the Russian Federation which accounts for more than half of the CIS economic output saw its GDP decline by 11.8 per cent on-year in the first three quarters of this year, and Ukraine, the CIS’s second-largest economy, by a staggering 17.8 per cent. In all, the CIS is estimated to have witnessed an economic decline in the order of 9 per cent on average, the CISISC deems. Strikingly enough, member states on the “poorer” end of the line have done relatively well. Kyrgyzstan and Tajikistan posted economic growth of 2.9 and 2.7 per cent respectively, while mid-size hydrocarbon producers Azerbaijan and Uzbekistan have been leading the pack with 6.1 and 8 per cent GDP growth respectively.

The question remains how GDP’s are composed. In countries where commodity export revenue accounts for substantial parts of their national incomes, those exports account for a substantial, and in some cases disproportional, part of GDP – at the detriment of the population’s personal income and its purchasing power. In cases, such as that of Kazakhstan, where the population, with the help of financial elites, has spent more than income justified, this has let to a near-implosion of the economy. Since revenue on export depends on world market prices which are by and large beyond control of Kazakhstan, so are income restraints for the population. Ignoring that reverses economic growth – especially when commodity markets show downward trends.

Another cause for discrepancies can be found in the investment side of the story. If it is true that the state has invested substantial amounts into industrialisation and the development of domestic manufacturing, Kazakhstan remains stuck with one disadvantage. With a small population scattered over an immense territory, which on top of it all has two very large far more industrialised neighbours on its borders being Russia and China, Kazakhstan has plenty of commodity markets around the corner but very little markets for end products, which require far more sophisticated and thereby far more expensive logistics – at the expense of its manufacturing sector’s competitiveness.

And of course, monetary policy plays a crucial role in all of it. Most CIS countries try to keep the middle of the road where it comes to valuing their national currencies against the two leading hard currencies in the world – meaning the euro and the US dollar. The Central Bank of Russia has installed a so-called currency basket for the purpose, which serves as a tool to determine the exchange rate for the following day based on market results of the day on a day-to-day basis. China, for all it matters, has followed the example. As for Kazakhstan, its National Bank, following an overnight devaluation of the Kazakh tenge by around 22 per cent in late February, it has stuck to its course of pegging its national currency to the US dollar with very narrow margins indeed.

The country’s overdependence on commodity exchanges the bulk of which keeps its benchmark prices denominated in greenbacks, explains this. But it has made European consumption and capital goods, which makes up for most of its importations from outside the CIS, all the more expensive for it on the domestic market. The answer, of course, is industrialisation. But there, one more obstacle pops up. Kazakhstan’s vast territory and incomplete infrastructure forbids large-scale production of industrial goods which requires export markets. With one industrial giant on its northern border and another one on its eastern border, Kazakhstan will depend on junior markets for industrial expansion in competition with China and the Russian Federation. This is extremely hard to go if the Kazakh community’s purchasing power is to be maintained – let alone improved.

Kazakhstan’s trend in terms of industrial production costs, which had boomed into the new millennium, has been reversed of late as a consequence of the government’s belt-tightening policy. In the first three quarters of this year, production costs on-year have contracted by almost a third (see table). It has tamed inflation, but not eliminated it. It would therefore be interesting if Kazakhstan’s national statistics agency would follow the example of other CIS member states and report monthly to the CISISC on the population’s “money income” and “money expenditure”.

Looking at other member states, interesting discrepancies appear. In Ukraine, income increased by 6.1 per cent and expenditure by 2.7 per cent over the first half of the year. In Russia, over the first three quarters these figures stood at 10.4 and 6 per cent respectively. By contrast, in Azerbaijan income stood at 9.8 and expenditure at 12 per cent in the first nine months. It means that people in Russia and Ukraine are trying to save money whereas Azeris appear to be little inclined to it. Whether the Kazakhs are really ready to follow the government’s counsel should become clear once the figures are on the table – and even then, their breakdown should be defined in order to attack the problem of overspending which has all but ruined household economies in Kazakhstan when the people let the good times roll. Badtimes should roll it back and ensure necessary constraints for the future.

KAZAKHSTAN’S KEY ECONOMIC INDICATORS OVER THE FIRST THREE QUARTERS OF 2008/’09 AS COMPARED WITH NEIGHBOURING CIS STATES (in percentages on-year)

country GDP ind.output investment prod.index cons.index
Kazakhstan (3.2) (1.0) 2.2 (29.4) 7.8
Russia (11.8) (13.5) (18.9) (7.4) 12.5
Kyrgyzstan 2.9 (11.5) 27.0 10.7 9.1
Uzbekistan 8.0 9.1 28.3 n.a. n.a.
Tajikistan 2.7 (10.0) (19.5) (7.5) 7.2
CIS average (9.0) (14.0) (18.0) (7.0) 12.0

source: CIS Interstate Statistics Committee

EXCHANGE RATES OF NATIONAL CURRENCIES IN CENTRAL ASIA INTO 2009
(in euro/US dollar)

country currency 31/12’08 31/07’09 30/09’09
Kazakhstan tenge 170.89/120.77 210.81/150.41 220.10/150.95
Russia rouble 1.44/29.38 43.82/31.29 44.01/30.09
Kyrgyzstan som 55.479/39.418 60.69/43.28 64.015/43.629
Uzbekistan sum 2050.4/1393.0 2091.7/1483.5 2184.8/1499.0
Tajikistan somoni 4.587/3.417 6.220/4.400 6.224/4.382

source: CIS Interstate Statistics Committee

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