By Hilary Schmidt, International Banker
With official data confirming that the economy grew by 5 percent during the first half of the year, it appears that Kazakhstan has recovered from its modest dip in 2022, which saw growth suffer from waning commodities-export demand, underperformance in key neighbouring economies such as Russia and China, and a dramatic global economic slowdown amidst a sharply tightening monetary environment throughout much of the world. But with inflation rates still more than double the central bank’s (National Bank of Kazakhstan’s) medium-term target of 5 percent and potential disruptions to a key pipeline still a threat to oil production this year, the promising outlook for Central Asia’s economic powerhouse remains tempered by distinct uncertainty.
A relatively young nation, having secured independence in 1991 following the collapse of the Soviet Union, Kazakhstan has nonetheless emerged as not only the largest economy in Central Asia but also the one with the highest income per capita in the region. This achievement was largely due to the prolonged period of stellar economic expansion during the early 2000s, when annual growth rates frequently exceeded 10 percent as the country’s predominantly oil economy enjoyed astronomical surges in crude prices. According to the International Monetary Fund (IMF), Kazakhstan undertook “rapid growth and increases in living standards, thanks to the country’s oil wealth, structural reforms and prudent macroeconomic management. Kazakhstan is now well advanced in its transition to a market economy.”
Although the 2008 Global Financial Crisis (GFC) firmly put the brakes on this steep growth trajectory for a couple of years, Kazakhstan nonetheless emerged during the 2010s as Central Asia’s key economic hope. The country enjoyed further spells of strong, uninterrupted growth throughout most of the decade, being hampered in any significant sense only in 2014 and 2015, when oil prices crashed and Russia underwent a dramatic economic slowdown, prompting the Kazakhstan government to intervene with a major stimulus programme to weather the deterioration. A large-scale privatisation plan was unveiled in late 2015, while the government’s Nurly Zhol economic policy—introduced the same year, with the state investing in massive infrastructure projects—was crucial in keeping the country’s economy running at just shy of 5-percent annual growth throughout the latter half of the decade.
The COVID-19 pandemic inflicted four straight quarters of negative growth on Kazakhstan’s economy, but Central Asia’s largest economy appears to be humming along once again near long-term-trend growth rates. Indeed, Minister of National Economy Alibek Kuantyrov reported that the GDP (gross domestic product) growth rate for the first six months of the year was 5 percent, with all major industries achieving positive performances, especially construction, trade, and information and communication.
This assessment was supported by Prime Minister Alikhan Smailov, who noted in July that the main contributions to economic growth in the January-June period were the mining and manufacturing industries (thanks mostly to the increases in crude-oil production by 5.6 percent and natural-gas production by 2.5 percent), construction industry and service sector. “The growth rate of investments in fixed assets amounted to 13 percent,” the Prime Minister’s Office also reported on July 12. “Their inflow increased in transportation and warehousing by 57 percent, trade by 32 percent, agriculture by 22 percent, education by 21.5 percent, as well as in industry by 10.9 percent, including mining by 11.4 percent.”
Investment in the country also significantly accelerated during 2023’s first half, with the World Bank recording a massive 13.1-percent year-on-year growth compared with the 9.2-percent growth rate during all of 2022. “Strong investment dynamics were supported by continued production increases in mining and manufacturing while the contribution from housing investment eased,” the Bank noted in its “Kazakhstan Monthly Update, August 2023”. “Retained earnings have been a key source of funding for capital investment (77 percent of total capital spending) in light of tightened credit conditions.”
Economic prosperity is also being achieved through a series of key fiscal, economic and political reforms underpinning much of the development unfolding across the country. Included are the expansions of free-trade zones (FTZs) and special economic zones (SEZs) to support native industries with tax incentives and better access to international markets; initiatives to attract more foreign direct investment (FDI) into Kazakhstan, such as Kazakh Invest—established by the government to “showcase Kazakhstan’s untapped investment potential across a range of priority industries, including agribusiness, mining and metals, chemicals and petrochemicals, machinery manufacturing and infrastructure development”; and the creation of the Astana International Financial Centre (AIFC) in 2018, a vibrant financial hub that has established a solid legal framework to advance the development of many financial services, including banking, asset management, capital markets, Islamic finance and fintech (financial technology).
But as is the unfortunate case throughout much of the world, inflation remains a distinct challenge for Kazakhstan’s economic policymakers, with annual prices still comfortably rising by double digits. Despite easing to a 19-month low of 11.8 percent in September 2023 from 13.1 percent in August, annual inflation remains well above regulators’ targets. But prices are expected to continue easing into 2024. “Inflation, while still elevated, is declining, reflecting a large base effect, lower food prices, exchange rate appreciation, and the impact of recent monetary policy tightening,” an International Monetary Fund team led by Nicolas Blancher stated on June 14, one week after the conclusion of its mission to the country. “Considering the increasing domestic fuel and utility tariffs, strong economic activity, and growing government spending, it should ease gradually to about 12 percent for 2023 (against 20 percent at the end of 2022). Lower international oil and metal prices should lead to a weaker external position and reduced oil fiscal revenues this year.”
Coupled with lower price growth, moreover, Kazakhstan’s annual GDP growth rates are expected to remain buoyant this year and next. The European Bank for Reconstruction and Development (EBRD), for instance, sees GDP at 5 percent for 2023 and 2024, as published in its “Regional Economic Prospects” report on September 27. This broadly aligns with the multilateral developmental investment bank’s expectations for the Central Asian region, at 5.7 percent and 5.9 percent growth, respectively. It is also an upgrade on the EBRD’s earlier May forecasts for Kazakhstan, which it has attributed to stronger expected investment and growth in construction.
On September 4, rating agency S&P Global Ratings also confirmed Kazakhstan’s sovereign credit rating at “BBB-/A-3”, maintaining a stable outlook for the country while citing its low net government debt and favourable net external-asset position, which should cushion it against external shocks. “We expect the economy will expand by nearly 5 percent in 2023, supported by growth in the construction, trade, information and communications, transport, and mining sectors. Over the next three years, we forecast that growth will average around 3 percent annually. A key factor will be the expansion of the Tengiz oil field, which should significantly increase oil production,” the S&P report read.
But while the Tengiz oil field has certainly helped bolster Kazakhstan’s prospects, other oil-industry challenges persisting today mean that a moderate degree of uncertainty accompanies analyst growth projections. Indeed, last year saw the operation of the Black Sea’s Caspian Pipeline Consortium (CPC) terminal (through which Kazakhstan exports about 80 percent of its oil and transports around 1 percent of the world’s oil) being shuttered frequently as a result of the war in Ukraine. As such, the World Bank recorded a 1.8-percent year-on-year decline in Kazakhstan’s oil production in 2022 and has suggested that any further disruptions to the pipeline this year could lead to losses in production volumes and fiscal revenues, which, in turn, would pose downside risks to growth.
“The country has seen significant expansion in sectors such as retail and wholesale trade and construction. There has also been a pick-up in public and private investment in infrastructure, transport and warehousing, reflecting Almaty’s growing role as a distribution hub serving Central Asian markets,” the EBRD’s September 27 assessment noted, while also acknowledging that the ongoing war in Ukraine “may have a negative impact on the operation of the Caspian Pipeline Consortium terminal on the Black Sea, potentially disrupting Kazakhstan’s oil exports”.
The IMF similarly warned that any future outlook comes with high uncertainty, again with Kazakhstan’s oil industry likely to be the main source. “Slower growth of trading partners could affect exports and growth in Kazakhstan, including through further oil price declines, while sustained disruptions to the CPC pipeline would be a major external shock,” the Fund noted in its July statement. “Inflation pressures could require maintaining the tight monetary stance for longer than is currently anticipated. Spillovers from the war in Ukraine could escalate through trade, foreign investment, and exchange rate channels, while secondary sanctions, if imposed on domestic entities, could affect domestic and international investor confidence.”