After a slowdown in 2009, the country is expected to resume economic growth in 2010, provided oil prices remain above $50. However, with the completion of the massive Kashagan oilfield still some years off, and banks remaining reluctant to make new loans, an immediate return to rapid GDP growth is not expected. Visor Capital expects 2010 to be a transition year for Kazakhstan, before the economy starts to rebound more strongly in 2011. The firm forecasts that GDP will increase by a modest 0.4% in 2010 after a 2.5% decline in 2009.
Kazakhstan's recovery is largely linked to the rise in global commodities prices in the second half of 2009. As of late 2009, Kazakhstan had already overtaken Australia and Canada to become the world's largest producer of uranium. Investment in oil and gas extraction continued through the crisis. Investors made some cuts, but oil companies were reluctant to risk losing their licences on major fields by cutting back too much.
The massive offshore Kashagan field is expected to become operational in 2012 or 2013. In addition to allowing investors to recoup their development costs, Kazakhstan stands to benefit financially. "This will probably be the start of a 10- to 15-year "Golden Age" for Kazakhstan," according to Visor Capital's head of research, Jean-Christophe Lermusiaux.
"Kazakhstan's future in the long term will depend on how the Kazakh authorities decide to develop the country, as a significant part of the GDP growth will depend on how they decide to invest profits from the oil and gas production," he says. "The country needs significant investments - probably in excess of $100bn - in infrastructure."
2009 saw increased investments into roads and to a lesser extent to electricity infrastructure. There are also plans to build nuclear power plants in Kazakhstan, and corporate deals signed with France, Russia and several other countries are helping state nuclear company Kazatomprom to increase its technical capabilities.
Kazakhstan is also expected to benefit from the continuing strong growth in China. China is already one of the largest consumers of Kazakhstan's natural resources, and the completion of the Kenkiyak-Kumkol oil pipeline and the Central Asia-China gas pipeline in 2009 will allow Kazakhstan to ramp up hydrocarbons exports in future.
Banking sector
Two of Kazakhstan's top four banks, BTA Bank and Alliance Bank, were taken under government control in February. As of the end of 2009, the restructuring process for both was finally close to completion. After months of uncertainty, this at last gives a much clearer direction for the banking sector and the wider economy for 2010.
BTA Bank, Kazakhstan's largest bank by assets at the time of the state takeover, signed a term sheet with its creditors' committee in December. Both sides agreed on the restructuring of BTA's $11.6bn debt. The deal is more favourable to creditors than had been previously expected, and is expected to gain the approval it needs from 75% of creditors, points out Milena Ivanova-Venturini, director of equity research, banking and finance, Central Asia at Renaissance Capital.
National Bank Governor Grigoriy Marchenko has since indicated that a deal with creditors is likely to be signed by March 2010. The restructuring process at Alliance Bank is also at an advanced stage and is likely to be wrapped up in 2010. Kazakhstan enters 2010 with a very different banking sector from the one it had a year earlier. Two of the top four banks, plus Astana Finance and BTA subsidiary TemirBank, are undergoing debt restructuring. While the sector was largely privately owned in January 2009, the government through the Samruk Kazyna national welfare fund is now the major stakeholder in BTA and Alliance, and also holds minority stakes in the other two top-four banks, Halyk Bank and Kazkommertsbank. In addition to its direct shareholdings, the government also accounts for the lion's share of the sector's liquidity indirectly - both through state programmes for example to support SMEs and the real estate sector, and through deposits from Samruk-Kazyna companies.
Foreign ownership is set to increase if Russia's Sberbank takes over BTA. However, the government and central bank have indicated that they may step in to prevent foreign ownership from increasing beyond 50% of the sector's total assets. This is believed to be mainly a signal that Halyk and Kazkommertsbank are not for sale.
Among the other big banks, Halyk, Bank CenterCredit and ATF Bank have all survived the crisis, as have smaller banks such as Eurasian Bank. They are now entering 2010 with plans to grow their businesses, taking advantage of the disarray in the sector and the flight to quality for deposits.
Lermusiaux notes that the banking sector's recovery has not yet got to a stage where it can boost the economy. "Today, Halyk and the other 'survivors' have a liquidity excess, but the number of new loans is decreasing. Kazakh state organisations and to a lesser extent the international financial institutions are the main source of financing at present as it is so tough to get loans. Typically, in a transition period in a healthy economy, you would expect a much higher proportion of private financing," he says. "The government has succeeded in stabilising the economy, but more efforts are needed to rapidly boost GDP. While large companies can access funding, many mid-sized companies are struggling. There is now stricter control of the financial sector in Kazakhstan than in Europe, so banks will need clear sign from the authorities to start lending again."
Inflation
Investment banks agree that inflation is under control in Kazakhstan. Visor's forecast is for 6.5% inflation for year-end 2009, 7.1% for 2010 and 7.5% for 2011.
Renaissance Capital expects that consumer inflation will stay below official estimates of 8.3%, which will give the government scope to keep fiscal and monetary policies loose for some time. "The benefits will filter down to the equity space though a lower cost of capital, more investment, and fewer non-performing loans," a Renaissance Capital report says.
Forex
The tenge was devalued by 25% against the dollar in early 2009. However, fears of a further devaluation later in the year were not realised. Kazakhstan strengthened its foreign reserves to $48bn as of December 2009. "The risks on the tenge are more on the upside. If the current position with oil and commodities continues, there are real prospects for tenge appreciation in 2010," says Renaissance Capital's Ivanova-Venturini.
Visor Capital forecasts a sustained growth in inflows to the National Fund, and a moderate appreciation of the tenge in 2010. "The authorities have made it very clear that they will not let the tenge appreciate easily," says Lermusiaux. "It will probably be flattish for a few months, but it is likely that the National Bank is likely to let it strengthen to around KZT145/USD by the end of the year. If oil prices continue to increase, the National Bank is likely to come under pressure to allow the tenge to appreciate because this will make it easier for Kazakhstani banks and other borrowers to repay foreign currency loans."
Renaissance Capital's report points out that Kazakh exports have become increasingly competitive as the Russian rouble and Brazilian real appreciated in the second half of 2009. "We expect Kazakhstan's relative competitiveness as an exporter to bring focus to its investment case in 2010," says the report.
Equities
As investors return to emerging markets, the risk premium assigned to Kazakhstan has fallen.
The main index of the Kazakhstan stock exchange, the KASE index, has rallied 81% as of December 2009. Renaissance Capital's RENCASIA index, which tracks mainly Kazakhstan-focused equities, increased by 88%. "We forecast 35% on the RENCASIA index for 2010," says Ivanova-Venturini.
Kazakhstan's rally is still more modest than those in Russia, where the RTS Index climbed by over 110%, and Ukraine's, where the PFTS Index was up by 100%. "We expect to see a return to the stock picking approach next year," says Visor Capital's Lermusiaux. "Fluctuations in stock prices will, however, still be mainly influenced by international macro signals. Since the markets tend to anticipate events by one year, stock prices will be looking forward to 2011, which we believe will be a year of faster growth in Kazakhstan, so there is still some room for upside for companies that will deliver earnings in line with expectations."
Among Kazakh equities, Renaissance Capital forecasts the greatest upside for banks, which underperformed their Russian peers in 2009. "We think a normalisation in the banking system will provide one of the most attractive access points to the Kazakhstan equity space in 2010," it says. It notes in particular Halyk and CenterCredit.
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