Kazakhstan: Large natural resource endowment is a boon, but not without its risks

Economic slowdown expected in 2024

For Kazakhstan, the fallout from Russia’s invasion of Ukraine has been limited. This is partly explained by the large inflows of Russian migrants and money along with the large increase in goods exported to Russia. After the slowdown that is expected later this year, real GDP growth is likely to rebound in 2025 (see real GDP graph below), boosted by an expected expansion of production capacity in the existing Tengiz oilfield. Any additional delays at this stage would however reduce 2025 growth prospects; moreover, as a member country of OPEC+, Kazakhstan will need to comply with the oil production cut agreed by the group.

In the long term, while the country may be rich in mineral resources, diversifying the economy beyond the oil and gas sector remains a key challenge, notably given that the state’s footprint in the economy remains very important. And while the country’s privatisation plan has been moving very slowly, an acceleration was announced last year. However, it still remains to be seen just how fast this privatisation could take place. 

Sound public finances

Because the public sector is a net creditor, public finances remain sound. The gross public debt amounted to less than 25% of GDP last year and is expected to remain below 30% in the coming years, in the absence of any major external shocks. In light of this, the authorities decided to reinstate a fiscal rule this year and to continue to consolidate the fiscal balance, which could require an increase in public revenues. It is worth noting that public finances are sensitive to the evolution of oil prices and production, as oil revenues have historically accounted for about 25% of total public revenues. Moreover, the 2008–2009 experience with the banking sector has shown that public support should not be taken for granted in case there is no explicit public guarantee.

Social tensions could resurface

In January 2022, an increase in prices fuelled large nationwide social unrest, which was quickly contained with help from Russian military troops. This led to the organisation of anticipated presidential elections and the announcement of various reforms such as the adoption of a new social code and an increase in social spending. Even when inflation increased further in 2022 and in early 2023, this did not lead to renewed social unrest, however the risk persists amid perceived corruption (the country is ranked 93rd in Transparency International’s corruption perception index), the risk of water shortages (despite large recent floods) and the poor distribution of benefits from commodities extraction. In the past, small-scale protests against the rising Chinese presence in the border region have also been witnessed, although looking ahead, this situation is unlikely to escalate as China is an important trade partner and foreign investor in Kazakhstan.

After a peak in inflation, the Central Bank successfully eased inflation pressures, and consequently has now started to ease its monetary policy (see the graph below, which shows inflation in red and the Central Bank policy rate in orange). This is welcome news, as it should reduce domestic financing costs for the public and private sector alike. 
 

Deterioration of the current account balance and the risk arising from a reliance on oil

After posting a surplus in 2022, the current account balance turned into a deficit in 2023 due to the fact that current account payments increased more rapidly than revenues, which have decreased slightly after a sharp increase in 2021 and 2022. Looking forward, the current account balance is expected to remain in deficit despite the large increase in oil production expected in 2025. 
 

Oil accounts for more than 45% of export revenues, implying that the OPEC+ member country is heavily reliant on the evolution of oil prices and production. Moreover, as highlighted by the 2022 interruptions of the Caspian Pipeline Consortium (CPC), one of the key risks facing Kazakhstan’s oil export revenues is its large reliance on the CPC to transport its oil to Europe, which accounts for about 80% of production. This implies that oil flows could be interrupted again due to tensions in the Black Sea (the terminus of the CPC is located at the Russian Black Sea port of Novorossiysk) or due to another Russian decision to reduce oil flows as it did in 2022, allegedly due to technical issues. To alleviate these risks, the Kazakh authorities – which have adopted a neutral stance with regard to the war in Ukraine – are trying to develop alternative trade routes that bypass Russian territory. The main initiative in the region is the Middle Corridor, a trade route that aims to connect China to Europe via Kazakhstan, Azerbaijan and Georgia, which also holds potential benefits for those countries. However, its full realisation requires substantial investment in infrastructure and coordination between different nation states, so this is going to take time.

ST political risk

Gross foreign exchange reserves (excluding gold and assets of the National Fund of the Republic of Kazakhstan) are at a relatively low level as they cover slightly less than two months of imports, but in any case Kazakhstan has access to financial markets given that its public finances are sound.

Since Russia’s invasion of Ukraine, Kazakhstan’s exports to Russia have increased sharply. Despite measures implemented by the authorities, the risk of secondary sanctions has increased, notably for entities that are helping to circumvent Western sanctions against Russia. This risk is taken into account when assessing the short-term political risk of Kazakhstan, which is currently classified in category 3/7. Should large sanctions be imposed, this could dampen Western investors’ confidence in the Kazakh economy and hence reduce investment inflows.

MLT political risk

Kazakhstan has a negative but acceptable net international position, representing about 30% of its GDP in 2022 and 70% of its current account receipts. A large share of its external liabilities consists of foreign direct investments, highlighting the country’s attractive position in the extractive sector (oil and mining) and its large endowment in natural resources. That being said, the gross external debt of Kazakhstan – 72% of GDP in 2022 – is one of the factors driving the MLT political risk in category 5/7. Other factors driving this risk – which represents the solvency of a country or its capacity to pay back its external debt in the long term – include its reliance on commodities, risks related to secondary sanctions, the CPC as well as the relatively poor rule of law (the country is ranked 36th according to World Bank’s governance indicators), the medium level of control of corruption (ranked 49th) and regulatory quality (ranked 53rd). At present, the MLT rating outlook is stable.

Analyst: Pascaline della Faille – P.dellaFaille@credendo.com