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Kazakhstan

Kazakhstan

Population 17.4 million
GDP per capita 12,400 US$
C
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2013  2014 2015 (f) 2016 (f)
GDP growth (%) 6.0 4.3 1.0 1.0
Inflation (yearly average) (%) 5.8 6.7 6.3 8.6
Budget balance (% GDP) 5.0 1.8 -3.2 -2.5
Current account balance (% GDP) 0.4 2.1 -7.0 -6.9
Public debt (% GDP)  12.9 14.9 18.3 18.8

 

 (e) Estimate (f) Forecast * incl. Oil Fund transfers (NFRK)

STRENGTHS

  • Expected increase in oil exports thanks to exploitation of Kashagan oil field
  • Abundant foreign direct investments
  • Strategically positioned between Asia and Europe

WEAKNESSES

  • Economy reliant on commodities (oil, gas, uranium and iron)
  • Fragility of the banking system
  • Persistent shortcomings in legal and institutional framework
  • Risk of political instability if succession to President Nazarbayev is rushed

Risk assessment

Growth curbed by the oil price collapse

Activity, which slowed sharply in 2015, is expected to remain very weak in 2016. Industrial output, dominated by the oil sector, has hardly grown. The start of operations at the offshore Kashagan oilfield is still being hit by severe delays and may not happen before the end of 2016. The start of production may allow a speed up of growth from 2017.

Major investment projects, especially work on the EXPO-2017 international exhibition are expected to sustain activity in construction and services. Consumption, the main growth driver, will be limited (as will investment) by the squeeze on credit as well as by rising prices. Exports are likely to suffer from the economic slowdown in China and the recession in Russia, but primarily from the weak oil price.

Inflation, fuelled by the effect of the tenge against the dollar, could exceed the upper limit of the target range  (6-8 %) set by the central bank (NBK). Price controls on certain foodstuffs could be lifted, increasing upward price pressure. In this context, the central bank is expected to keep interest rates high (16% in October 2015) to limit inflation.

 

Budget and current account deficits which appeared in 2015 unlikely to narrow in 2016

Budgetary receipts, over half of which derive from the oil sector, are likely to be affected by only marginal growth in hydrocarbon production and low oil prices. The depreciation of the currency could, however, offset the drop in oil revenue in dollar terms as it is denominated in tenge in the budget. Non-oil tax receipts will increase slightly. Public sector wage rises, initially planned for 2015, have been announced for 2016. The infrastructure projects, moreover, are likely to be maintained. However, this spending is likely to be financed mostly by the oil fund (NFRK) and pensions funds, limiting its impact on the budget, although the State is expected to continue to support indebted public companies (in particular the national energy company, KazMunaiGaz).

Oil exports (75% of total) are unlikely to increase, given the production difficulties and low oil prices. Demand is also expected to remain sluggish on Kazakhstan's main markets: the EU, China and Russia. Imports are expected to be constrained by a low internal demand. .

After the NBK decided to introduce a floating exchange rate system in August 2015, triggering a more than 20% slide in the tenge, the currency continued to weaken and lost almost  50% against the dollar  during 2015. The downward pressure is expected to last until 2016,and the volaitility of the exchange reate will remain high .

The country remains exposed to external shocks, with most bank and corporate debt denominated in foreign exchange. However, foreign exchange reserve levels (5 months of imports, excluding gold) and the assets of the NFRK (USD  63 billion at the end 2015, i.e. about 30 %  of GDP) mean there is some leeway in liquidity terms.

The banking sector is very weakened by the impact of the depreciation on bank debt and the worsening quality of the portfolio. The weigh of deposit (more than half) and loans (around 30%) demonimated in foreign currency is a source of vulnerability of the sector.

 

The issue of President Nazarbayev's succession remains a source of uncertainty

Since 1991, the country has been led by Nursulatan Nazarbayev and his party (Nur Otan), which holds a big majority of seats in the Assembly. Nursulatan Nazarbayev was re-elected for a fifth term in April 2015 with 98% of the votes cast. In January 2016, President Nazarbayev announced early Parliamentary elections in March 2016 (initialy scheduled in 2017). If there is little doubt about the result due to the lack of real opposition, the speeding up of the electoral timetable may be justified by the president’s desire to obtain a new legitimacy. There is still uncertainty as to the country's political stability due to the risk of conflict which could break out between the different government factions, if the president's (74 yers-old) succession had to be rushed in the event of his being unable to remain in power.

There is growing popular discontent over low wages, rising prices and corruption. Organised mass protests are, however, still unlikely especially since the security measures, tightened in response to fears of terrorism and religious extremism, limit the opportunities for large-scale protests.

Despite real progress, the business climate is greatly hampered by State interference in the economy, ineffective institutions and corruption.

 

Last update: March 2016

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