Kazakhstan ready to sacrifice growth for stability

Kazakhstan, one of the early victims of the global crisis, is ready to sacrifice future growth rates in favour of stability and will likely keep tight state control over the economy as it recovers.

Before getting struck by the U.S. mortgage meltdown in 2007, the oil-rich Central Asian state had enjoyed a decade of average 10-percent economic growth thanks to high oil prices and the influx of hot money into its banking system.

But the same factors have now pushed growth into negative territory. First, funding sources dried up, leaving banks struggling to meet repayment schedules. Then, oil prices plunged, pressuring the local tenge currency and state reserves.

The former Soviet republic responded by launching an anti-crisis plan already in 2007, in a package which has so far included $19 billion of state aid, full or partial nationalisation of the largest banks, and trade barriers to protect vulnerable industries such as sugar production.

'The government got an early reminder of the double-edged sword of the accelerated global integration and started working on an anti-crisis programme in 2007, well in advance of other emerging market economies,' Nomura analyst Ivan Tchakarov says.

RECOVERY NEAR

Central bank Chairman Grigory Marchenko said this week the bank expected January-September GDP to be flat year-on-year and saw growth of 0.1-0.3 percent for the whole of 2009.

Still, analysts and officials agree that a fully-fledged recovery is more likely next year, as the state aid package trickles down to the wider economy and the government sorts out banking sector problems.

Two large Kazakh banks, BTA and Alliance, are in talks to restructure over $14 billion in debts and their creditors face losses of about 80 percent or prospects of long and messy bankruptcies.

'The full effect of the state package has not been seen yet and we will see it only in the beginning of the next year,' Marchenko told a briefing this week.

However, Kazakhstan may not return to the past decade's stellar growth rates in the future as it will enforce a stronger countercyclical policy, giving up some growth to avoid harsh declines, he said.

'If we have growth of 7 percent instead of 10 percent seen in the last 8 years, this will be a very good growth rate and we will be quite happy about it,' he said.

BANKING, OIL UNDER CONTROL

Analysts say the Kazakh government, which adopted a liberal economic policy in the 1990s to promote private entrepreneurship and foreign investment, will now play a more assertive role in the economy.

'I think this will be something in between (total state control and free market): the state will remain or become dominant in some sectors,' said Anton Tabakh, an analyst at Russian brokerage Troika Dialog.

'Those sectors will be oil, where everything is already concentrated in the hands of state companies, and banking.'

Tabakh said other sectors, such as manufacturing and consumer goods, were likely to remain mostly private and would probably become even more open to foreign investment as the government would stay away from smaller projects.

However, overall growth will still hinge on oil prices and the implementation of Kazakhstan's plans to boost output by tapping its Caspian oil fields, he said.

'Obviously, this year will be terrible but the next one will be reasonably good.'

Reuters