Fragile Kazakhstan Struggles For Economic Growth
Kazakhstan’s glitzy capital yields few clues that the country is flirting with recession.
The Ritz-Carlton group is set to open a luxurious hotel here this year, as will St. Regis in March 2017, and the Abu Dhabi Plaza is under construction as its planned 88 floors continue to lurch skyward.
Starbucks opened its first cafe in the city in September, as did McDonald’s in March. Both are expecting to open second outlets. New restaurants and bars are popping up, including Zoloto, owned by Russia’s Bulldozer Group and Ocean Basket, one of South Africa’s largest seafood restaurant chains. Taxi-app service Uber launched in Astana in June.
Construction activity is frenetic, with a $2 billion pipeline of government infrastructure projects underway for next year’s Astana Expo 2017. Most units in residential real estate projects pre-marketed by developers BI Group and Bazis-A Group have been snapped up and are nearing completion.
Yet by most accounts, Kazakhstan is facing its worst economic crisis in 20 years. Hit by a triple whammy of slumping oil prices, a geopolitical crisis between Russia and the West, and a slowdown in the Chinese economy, Kazakhstan’s gross domestic product grew just 0.1% year-on-year in the first half of 2016, following a paltry 1.2% in 2015.
Business confidence has been shaken by extreme currency volatility, with the tenge having declined from 140 to the dollar to around 340 over the last 30 months, following the central bank’s move to partly float the currency.
Among the industries to be hit by this downturn is the cement sector, despite the ongoing construction projects. Kazakhstan’s cement consumption grew between 15% and 30% annually over the last decade — with a single annual a fall in sales in 2009 — but 2016 is looking a lot less rosy.
“We anticipate cement demand nationwide to decline by up to 5% year-on-year this year, from 2% growth last year,” Javier del Ser, CEO of London-listed Steppe Cement, one of the country’s largest cement producers, told the Nikkei Asian Review.
Other economic indicators are also sparking fears of a prolonged downturn. Industrial production declined 7.5% year-on-year in August, one of the sharpest monthly falls in a decade. Consumer sentiment remains fragile, with retail sales down 2.5% year-to-date compared to the same period in 2015. Average primary real estate prices in major cities are down nearly 50% in dollar terms from their 2008 highs, according to industry portal Krisha.kz.
Away from Astana, the economic slowdown has been more visible, including in Aktau, a port city on the Caspian Sea that has long been one of Kazakhstan’s fastest growing.
Hotels popular with oil executives, such as the Caspian Riviera Grand Palace and the Renaissance Aktau Hotel, have suffered a large drop in visitors. Likewise, the Tree of Life resort, a seafront water park and resort 30km south of Aktau, has struggled to attract visitors over the summer.
Other industrial cities in the country’s northern and central areas face rising unemployment and growing tensions with labor unions, with big mining companies such as Luxembourg-based ArcelorMittal making significant cuts in wages and headcount.
Spark of hope
With worries about recession mounting, an announcement in June by Tengizchevroil, operator of the Tengiz oil field in western Kazakhstan, that it would implement a $36.8 billion expansion plan, came as a crucial vote of confidence. Tengizchevroil is 50% owned by Chevron, 25% by ExxonMobil. and the rest by state-backed entities.
The project would constitute the biggest new investment in hydrocarbons worldwide since the 2014 collapse in commodity prices, according to Wood Mackenzie, a commodities consultancy.
Most importantly, it could provide a sorely needed source of new revenue. Last year, Kazakhstan recorded a fiscal deficit of 5% of GDP, forcing the government to draw on its oil fund to help finance public investments.
“I generally view Tengizchevroil as having a positive impact in the near-to medium-term because it means a significant amount of new construction and engineering work,” said Ekaterina Terskin, associate at CITIC Kazyna, a Beijing-based fund with interests in the power, logistics and transport sectors. But Terskin said that more clarity on the project timeline was needed to assess the impact on the economy.
While few have denied Tengizchevroil’s potential importance in kickstarting the economy, some question the ability of KazMunaiGas, the local partner with a 20% stake in the project, to finance its share of the project.
Implementation is another concern, following problems surrounding Kashagan, Kazakhstan’s other major western oil field, which resulted in billions of dollars in wasted investment over the last few years.
Tengizchevroil aside, there are few bright spots in the economy. “Private consumption will remain weak due to sharp falls in real incomes and the inability of the banking sector — already heavily indebted — to lend,” said Anuar Ushbayev, managing partner at Tengri Partners, an Almaty-based private equity firm. “Meanwhile, government spending will suffer constraints from conservative fiscal deficit targets for the next year.”
Kazakhstan’s foreign reserves have now increased to more than $30 billion, partly as a result of central bank buying. While this has allowed the tenge to recover slightly against the dollar, it also makes the currency more expensive relative to the ruble, eroding Kazakhstan’s competitiveness relative to Russia.
Furthermore, disparities between Astana and many other parts of the country continue to widen, with a growing perception that local residents are suffering from high inflation, ecological problems and an increasing influx of foreign labor.
The city of Atyrau, home to the headquarters of Tengizchevroil, has been a prime example of such unrest. Residents have been protesting since April against a land reform bill that would grant some land ownership rights to foreigners.
The authorities clamped down on protests in May, with police cordoning off several roads adjacent to the city’s central square, and the government cutting off mobile internet networks in Atyrau and other nearby cities.
The western city of Aktobe, the country’s third major oil city, has also seen growing instability, following a terrorist attack in June which killed 25 people and injured dozens.
Against this backdrop, Prime Minister Karim Massimov was moved to head the country’s National Security Committee in September — an appointment widely seen as a promotion reflecting the government’s focus on domestic and regional political stability.
With its array of socioeconomic challenges, the Kazakh economy has been forecast by the World Bank to grow just 0.1% in 2016. But the bank sees growth accelerating to 1.9% in 2017 and 3.7% in 2018.
“Although Kazakhstan faces fiscal challenges, the central bank’s partial floating of the currency will help ease many problems related to demand and competitiveness in the medium term,” said Oleg Kouzmin, vice-president at Renaissance Capital, a Moscow-based investment bank.
“Market signals indicate that investors have acknowledged this — over the last few months, the spread between long-term Kazakhstan and Russian euro bonds has narrowed significantly.”
Baljeet Kaur Grewal, managing director at Samruk Kazyna, the country’s sovereign wealth fund, said that a government initiative to privatize stakes in state-owned enterprises is also spurring interest, given the high potential yields on offer.
“We see a growing rank of interest from both European and Chinese companies in several sectors, ranging from telecoms and airlines, to infrastructure and even uranium mining,” she said. “Kazakhstan is benefiting from a lack of investment opportunities in many developed markets.”