TRANSITION REPORT 2014 Innovation in Transition

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Highlights

  • Kazakhstan has launched an ambitious economic reform agenda. Structural reforms are speeding up with the support of international financial institutions, including the EBRD. In addition, further steps are being taken to improve the investment climate, public administration is being reformed and a large-scale privatisation programme has been launched.
  • A treaty establishing the Eurasian Economic Union (EEU) was signed in May 2014. The treaty comes into force in January 2015 and will deepen ties between Belarus, Kazakhstan and Russia, which had already joined forces in a Eurasian Customs Union (ECU) in 2010.
  • Uncertainties surrounding the Kashagan oil field still remain. The world’s fifth largest oil field, and potential source of significant government revenues, is not expected to produce at all in 2014 due to gas leaks, and only limited output, if any, can be expected in 2015.

Key priorities for 2015

  • Diversification of the economy and lowering dependence on hydrocarbon exports remain a significant challenge. Dependence on natural resources may increase further as new oil fields come on stream in 2014-18. Implementation of the authorities’ broad diversification programme will be a key challenge.
  • Further progress needs to be made to the structural reform agenda. Improving the country’s competitiveness and productivity requires both public initiative and public support. The authorities have signed partnership agreements engaging international financial institutions, including the EBRD, to accelerate structural reforms and modernise the economy.
  • The large stock of NPLs needs to be addressed. The legal framework for non-performing loan (NPL) resolution has been strengthened, and ambitious targets have been set to reduce NPLs, but actual progress is yet to be seen.

KAZAKHSTAN HAS LAUNCHED AN AMBITIOUS ECONOMIC REFORM AGENDA

A TREATY ESTABLISHING THE EURASIAN ECONOMIC UNION WAS SIGNED IN MAY 2014

UNCERTAINTIES SURROUNDING THE KASHAGAN OIL FIELD STILL REMAIN

2014 sector transition indicators
Corporate Energy Infrastructure FI

Source: EBRD. 
Note: FI – Financial institution; ICT – Information and communication technology; Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.


Main macroeconomic indicators %

  2010 2011 2012 2013 2014
          proj.
GDP growth 7.3 7.5 5.0 6.0 5.0
Inflation (average) 7.1 8.3 5.1 5.8 7.9
Government balance/GDP 1.5 6.0 4.5 5.2 3.8
Current account balance/GDP 0.9 5.4 0.5 -0.1 0.3
Net FDI/GDP 2.5 4.6 5.8 3.4 3.5
External debt/GDP 79.9 66.6 67.3 64.2 n.a.
Gross reserves/GDP 21.9 21.8 11.8 9.4 n.a.
Credit to private sector/GDP 34.8 31.8 32.8 32.0 n.a.

Macroeconomic performance

Economic growth remained robust at 6 per cent in 2013. Growth was primarily driven by domestic demand, resilient investment dynamics, strong consumer spending and growing oil extraction. In the first half of 2014 economic growth decelerated to 3.9 per cent reflecting weaker external demand from emerging markets, the slow-down in Russia, lower investor confidence following the devaluation in February and weaker growth in the mining sector. The economy remains highly dependent on oil and gas exports. In June 2014 Standard & Poor’s downgraded Kazakhstan’s credit rating to negative.

The National Bank of Kazakhstan (NBK) devalued the tenge by 20 per cent in February 2014. With more than half of domestic consumer goods imported from abroad, devaluation puts pressure on price levels and the purchasing power of households. To mitigate these effects, the government has imposed anti-inflationary policies, but inflation has nevertheless been rising this year, increasing to 6.9 per cent in July 2014 from 4.8 per cent at the end of 2013.

The fiscal and current accounts remain in surplus. The fiscal surplus improved significantly from 4.5 per cent of GDP in 2012 to 5.2 per cent in 2013, due to the decline in total spending in both capital and current expenditures. Meanwhile the current account balance moved from a marginal deficit in 2013 to a surplus in the first quarter of 2014. This is owing to a rise in exports – mainly oil exports – by around 11 per cent year-on-year, as well as a compression in imports due to lower demand.

Kazakhstan raised US$ 2.5 billion in 10- and 30-year dollar-denominated bonds in October 2014, returning to the international bond markets for the first time since 2000. The 10 and 30-year bonds were priced to yield 4.073 per cent and 5.116 per cent, respectively. The deal was heavily oversubscribed, notwithstanding concerns about the falling oil price and the impact of an economic slow-down in Russia. The net proceeds from the sale will be used for general budgetary purposes, including financing the state budget deficit.

NPLs remain high at around 32 per cent, mostly concentrated in three banks. BTA, Kazakhstan’s third largest bank and the one with the highest level of NPLs in the country, underwent its second debt restructuring at the end of 2012 and is being merged with Kazkommertsbank in 2014.

Economic growth will be moderate in 2014. Weaker exports, a drop in oil prices and higher import costs of capital and intermediate goods from Russia may negatively affect growth. This negative effect might be somewhat offset by export substitutions as a result of Russia’s counter-sanctions on the import of certain goods from the European Union and several other countries. A reduction in consumer spending and continued debt overhang in the banking sector will also likely negatively affect growth in 2014. Growth in 2015 is expected to remain at the current level, although there is still significant uncertainty owing to risks of a further drop in oil prices, the slow-down in Russia’s economy and the impact of counter-sanctions imposed by Russia on the EU, the United States and other countries restricting imports of certain products.


Major structural reform developments

A treaty establishing the Eurasian Economic Union has been signed. The EEU, which formally comes into force on 1 January 2015, will deepen ties between Belarus, Kazakhstan and Russia. The three countries had already joined forces in a Eurasian Customs Union in 2010. The treaty envisages free transit of goods, services, capital and workforce. Member states will also conduct coordinated macroeconomic and structural policies in key sectors of the economy such as energy, industry, agriculture and transport. While the establishment of the EEU keeps Kazakhstan closely engaged in regional economic integration with its partners, the government is also moving rapidly towards finalising its World Trade Organization (WTO) accession by the end of 2014. WTO membership will further change Kazakhstan’s tariff structure, mainly through downward adjustments.

The authorities are stepping up efforts to speed up structural reforms. Kazakhstan has actively engaged with international financial institutions, including the EBRD, to drive forward reforms, which are necessary for the country to become a dynamic emerging market economy. A sum of US$ 2.7 billion will be provided by the country’s National Oil Fund and other sources to finance important sectors of the economy, which will enable development partners to be engaged in different projects by providing enhanced and wide-ranging policy dialogue and technical assistance. The authorities also announced a broad diversification programme. The Strategic Development Plan for Kazakhstan up to 2020 and the 2050 Strategy also outline the importance of economic diversification, support for small and medium-sized enterprises, and continued efforts for privatisation.

Further measures were taken to improve the investment climate in Kazakhstan. The visa regime was significantly simplified for most developed countries based on the “green corridor” principle, including the introduction of special investor visas for senior management of foreign companies. Procedures were simplified to attract foreign labour for investment projects by providing the option of hiring a foreign labour force during the project’s implementation phase plus one year (without foreign workforce permits). Kazakhstan is also introducing the principle of law stability in tax, migration and environmental spheres, as well as predictable regulated tariffs and prices in the long term. Additional incentives were introduced, such as: compensation of up to 30 per cent of capital costs (investment subsidy); corporate income tax exemption for 10 years; long-term guaranteed procurement of goods and services by national holdings, national companies and government agencies; subsidies for part of the energy and transport costs; and prolonged leasing terms of agricultural lands for foreigners should they invest in commodity production. Increased access for foreign investors to international commercial arbitration has also been introduced.

Kazakhstan is launching large-scale privatisation. The government has developed a privatisation programme for 2014-16 to reduce the state’s participation in the national economy and increase the private sector share in GDP. The programme started with the “People’s IPO”, an initiative to sell (minority) stakes in selected major companies to citizens, pension funds and, on a residual basis, other investors. In April 2014 the government approved a list of 94 companies of Samruk-Kazyna (the National Welfare Fund), which will be subject to privatisation. In May 2014 a management committee was created to monitor and control the implementation of the privatisation programme. The committee developed and published the rules for the divestment of assets within the programme, including policies that determine the rights and obligations of bidders, approaches to the preparation of assets prior to sale, and sale mechanisms (single-stage auctions, two-stage auctions, and so on).

Public administration is being reformed. In August 2014 the President of Kazakhstan announced the restructuring of its 17 ministries into 12, thereby streamlining public administration by creating a compact government consisting of a small number of “super ministries”. The Ministry of National Economy will take over the duties of the Ministry of Economy and Budget Planning, the Ministry of Regional Development, the State Statistics Agency, the Agency for Protection of Competition, the Agency for Regulation of Natural Monopolies and the Consumer Protection Agency. A Ministry of Energy will be created and will assume the functions of the Ministry of Oil and Gas, the Ministry of Industry and New Technologies, and the Ministry of Environment and Water Resources. In addition, the Ministry of Energy will become the regulator in the gas and oil sector, a role that was previously exercised by the national oil company KazMunayGas. Within this public administration reorganisation the government is consolidating several regulatory agencies under its branches.

A programme on industrial-innovative development for 2015-19 was approved in August 2014. The main objective of the state programme is to promote diversification and competitiveness in the manufacturing sector. A tax amnesty for small and medium-sized enterprises was also announced to write off overdue fines and penalties as of 1 October 2014.

The legal framework for NPL resolution has been strengthened. The National Bank of Kazakhstan has announced a plan to introduce requirements stipulating the reduction of system-wide NPLs to a maximum of 15 per cent by 1 January 2015 and 10 per cent by 1 January 2016, and make these requirements part of prudential regulation. New legislation, which temporarily removes tax treatment disincentives for NPL write-offs, has been passed. In parallel, a second Distressed Asset Fund has been created, although the volumes involved remain modest. Amendments to the insolvency law to strengthen the protection of legal rights of secured creditors are also expected to be introduced in the near term.

New macroprudential measures are in place to decelerate the rapid growth in consumer lending. Consumer lending stood at around 46 per cent in 2013. Under new regulations adopted by the NBK, a 50 per cent cap has been applied to the debt-to-income ratio, the capital adequacy requirement on unsecured consumer loans has been increased to 100 per cent (from 75 per cent) and a 30 per cent ceiling has been introduced on the growth in consumer loans for each bank.