History & Politics

The geographic area in central Asia now occupied by the Republic of Kazakhstan (2.7 million sq km) was populated from around the 13th century by tribes of Turkic and Mongol descent. A distinct Kazakh culture and language emerged over the following two or three centuries. During the 18th and 19th centuries, in a general push south, the Russian Empire conquered what is now Kazakhstan. After a brief period of autonomy in the wake of the tumult following the Russian Revolution of 1917 and the end of the First World War, Kazakhstan was incorporated into Soviet Russia in 1920. In 1936, it was formally designated a Soviet Socialist Republic and effectively retained this status until independence in December 1991. Russian remains the official and dominant language, although there is also a Kazakh language spoken by about 65% of the population.

Since independence, Kazakhstan has been very stable politically under the direction of President Nursultan Nazarbayev. The 69 year old President rose to prominence as the leader of the Kazakhstan Communist Party in 1989. He was overwhelmingly elected President in 1991 and again in 1999 and 2005; in this latter election, President Nazarbayev received no less than 91% of the popular vote. The OSCE (Organization for Security and Co-operation in Europe) concluded that the 2005 election did not meet international standards, although arguably this was no surprise.

The next Presidential election is scheduled for 2012. President Nazarbayev has the ability, under an amendment to the constitution in 2007, to run for election indefinitely and is de-facto President for life. Once his term ends, however, future Presidents will be limited to two consecutive five-year terms. The CIA officially refers to the system of government in Kazakhstan as authoritarian. This reflects the concentration of power under the constitution in the hands of the executive branch of government and more specifically the President. Kazakhstan does have a bicameral parliament but the President’s Nur Otan (Fatherland) party, along with appointees and those sympathetic to him politically, dominate both chambers. Despite the authoritarian tendency of the Kazakhstani government, it is important to note that good progress has been made in the country since independence in establishing a market based economy, where resources are allocated by the price mechanism rather administrative fiat. Indeed, we believe Kazakhstan is by far the most advanced country in central Asia in this regard.

Interestingly, the World Bank has ranked Kazakhstan number 70 out of 181 countries in terms of the ease of doing business based on ten criteria, including the protection of investors and property rights. This score puts Kazakhstan well above the ranking of any other Central Asia economy and also in excess of Russia, which ranked 120 in the latest World Bank survey. Importantly, Kazakhstan’s number 70 ranking in the World Bank’s 2009 survey constituted a significant improvement from 80 in the prior year. It should also be noted that the IMF has praised Kazakhstan’s fiscal regime and that Moodys has assigned the country an investment grade credit rating.

Economy

With GDP in 2008 of about $108bn, Kazakhstan ranks as comfortably the largest economy in Central Asia. The World Bank classifies the economy as upper middle income with gross national income (GNI) per head in 2008 of $6,140. This is also easily the highest income per capita in Central Asia but around 20% less than that prevailing in Russia.

The population of Kazakhstan is approximately 15.6 million (UN 2009). Reflecting the country’s rich natural resource endowment, the economy is dominated by the extraction and processing of a wide range of mineral resources of which crude oil is the most important. Kazakhstan also has an important agricultural sector focused on the production of grains. In 2008, industrial activity accounted for about 39% of GDP while the contributions of services and agriculture were 55% and 6% respectively. Exports, principally of oil and gas and minerals and metals, account for about 60% of GDP.

The Kazakhstan economy grew strongly between 2000 and 2007. Real GDP growth over the period averaged almost 10% pa driven in large part by surging crude oil output but also by buoyant capital inflows, the economic reform programme and bountiful harvests. Economic growth began to decelerate noticeably in late 2007 and in 2008 averaged 3.2%, the slowest rate since 1999.

The slowdown was initially triggered by a reversal of capital flows as credit conditions tightened in the western world. In this context it should be noted that, from around mid decade, the Kazakhstan banking system became increasingly dependent on foreign capital inflows. The reversal of these inflows, combined with the emergence of some poor quality assets, seriously impacted the finances of the banks, leading to curtailed lending. Real estate development and construction activity have been particularly badly impacted. The economy continued to suffer from the acute malaise in the financial and real estate sectors in 2008 and early 2009 but was additionally hit by powerful recessionary forces in the global economy.

Particularly important in this context were the downward pressure on oil prices, softening demand for industrial metals and falling remittances from expatriate Kazakhstanis located in Russia. Kazakhstan was officially in recession in the first quarter of 2009 with GDP down about 2.2% on a year previously. Going into this downturn, Kazakhstan’s public finances were in good shape thanks in part to the earlier creation of a National Oil Fund that saved the surplus oil revenues from the boom years. The Kazakhstani authorities have therefore been in a strong position to support the economy during the past two years.

The key manifestation of this has been the bolstering of the financial system and the part nationalisation of the four largest banks. This action will have increased the government’s external debt exposure, possibly considerably, but fortunately Kazakhstan started from a low base in this regard. The budget deficit is expected to widen between 2008 and 2009, but at the equivalent of 3.6% of GDP based on the Economist Intelligence Unit, is hardly excessive by international standards.

Despite the stimulatory policy thrust of the Kazakhstani authorities and a 20% devaluation of the tenge in February 2009, real GDP growth still looks like being at best mildly negative in 2009. The Economist Intelligence Unit is forecasting -0.4% and the IMF -2.0%. We would expect a resumption of growth in 2010, albeit on a modest scale of perhaps 1% to 2%, reflecting investment in the oil and gas sector, a firming global economy and higher bank lending in the wake of the stabilisation of the banking system. Medium term, we believe it is very unlikely that economic growth in Kazakhstan will return to the 9% to 10% rates of earlier this decade.

Quite simply, the combination of circumstances prevailing at the time was unusually propitious. Kazakhstan is however blessed with considerable natural advantages and is being managed responsibly which suggests that growth rates of 4% to 5% pa may be possible over the long haul. The Economist Intelligence Unit is forecasting real economic growth for Kazakhstan of 2.3%, 4.2% and 5.7% for 2011, 2012 and 2013 respectively.

The boom years of the current decade in Kazakhstan were associated with high rates of inflation reflecting severe supply constraints. Consumer prices increased at about 9% pa between 2000 and 2008. Inflationary pressures, in fact, intensified in late 2007 and 2008 with the consumer price index surging by 17.2% in the latter year. So far in 2009, inflationary pressures have eased considerably as economic activity and commodity prices have softened. In the year to June 2009, the consumer price index was up by 7.6%. For 2009 as a whole, consumer price are expected to show a gain of about 8.5%. A further slowing to around 6.5% is possible in 2010 but thereafter inflation could accelerate, as bottlenecks in the economy once again begin to resurface.

Tenge

The national currency of Kazakhstan is the tenge (1 Kazakh tenge = 100 tiyn).

In recent times, the tenge has been a managed currency. After being pegged at a central rate of 120 to the US dollar since late 2007, the currency was allowed to weaken modestly in the closing weeks of 2008 and in early 2009 to around 123. This was followed by the central bank’s decision in February to devalue the currency by 20%. The new central rate was 150 to the dollar with a trading range of +/- 3%. The decision to devalue reflected a combination of the heavy pressure on Kazakhstan’s exchange reserves in supporting the earlier 120 peg and the sharp 56% depreciation in the Russian rouble between mid 2008 and early 2009. Russia, it should be noted remains Kazakhstan’s main trading partner.

Kazakhstan’s ability near term to maintain a rate of 150 to the dollar for the tenge without undue intervention appears pretty good. The key factors here are the recovery in the oil price since the lows of late 2008 and early 2009, the stabilisation of the banking system and most significantly perhaps the approximate 15% firming in the rouble against the dollar since bottoming in May. Despite the appreciation in the rouble over the past two months, it has still underperformed the tenge over the last 12 months. A key issue for Kazakhstan longer term is the potential for real exchange rate appreciation, given its importance as an oil producer and pronounced underlying inflationary pressure. Real appreciation was marked between 2002 and 2008.