Country risk: Kazakhstan safer than Russia for first time in five years

Russian president Vladimir Putin greets Kazakh president Kassym-Jomart Tokayev at a meeting last year. Photo: Reuters

Kazakhstan’s investor risks have eased in Q2 2021, continuing the improvement evinced earlier in the year, according to the provisional results from Euromoney’s latest country risk survey, to be released later this month.

Higher oil prices, bolstering the country’s macro-fiscal fundamentals, coupled with political and economic reforms leveraging its longer-term prospects, are brightening the risk picture, according to analysts taking part in the survey.

Kazakhstan is a medium-risk, tier-three country in Euromoney’s five-tier categorization of 174 countries. Its present global ranking of 63rd puts it head and shoulders above the other countries in Central Asia, including Azerbaijan (85th), Tajikistan (91st), Uzbekistan (94th) and lowly Kyrgyz Republic (139th).

The country has risen 17 places this year and it is now considered a similar country risk to Italy and Trinidad & Tobago. It is also safer than Russia (68th) for the first time in five years:

This is music to the ears of president Kassym-Jomart Tokayev, who is only the country’s second leader since it gained independence in 1991 after being handed the baton by Nursultan Nazarbayev in 2019.

The new, younger and more tech-savvy national figurehead has continued with reforms to promote the country’s economic development, while taking a forceful line against corruption and introducing some political reforms.

With the ruling party Nur Otan not about to relinquish its grip on power any time soon – and Nazarbayev still playing a role as chair for life of the Security Council of Kazakhstan along with a few other honorary positions – it may not be ideal from a democratic viewpoint, but it is a step in the right direction.

This is underlined by gradually improving scores for factors such as corruption, information access/transparency and government stability.

Dmitri Fedotkin, director of macroeconomic analysis at the Russian Agency for Export Credit and Investment Insurance (EXIAR), is an expert on the risks affecting the region and acknowledges progress on the president’s agenda.

On the political side, he says: “There are initiatives to lower the 7% hurdle in parliamentary elections to 5% and allow an option to vote ‘against all candidates’ that may improve representation in the legislative bodies of the country.”

On the economic side, Fedotkin adds: “The authorities are discussing the National Development Plan to 2025, which includes 12 strategic development programmes that aim to increase the share of small- and medium-sized businesses in the economy to 35% of GDP, establish average real-terms GDP growth of 5% per annum and dramatically increase the share of the non-oil economy and exports.”

He also mentions there are plans to improve Kazakhstan’s positions in key international comparison ratings and indices, as well as regulations and legislation governing investments in the economy.

“The scale of the planned measures is quite vast, and it may not come into life quickly or easily,” says Fedotkin. “It may take another one-to-two years for these fruits to ripen, so it may take some time for relevant scores to improve in Kazakhstan.

“But all in all, the president and government seem dedicated to pushing Kazakhstan into the future.”

Not all the changes are positive. The government has made transferring property more difficult, as well as resolving insolvency.

Kazakhstan is nevertheless 25th in the World Bank’s Doing Business rankings, sandwiched between Ireland and Iceland on the back of regulatory improvements to starting a business, dealing with construction permits and accessing credit.

Oil bounce

The recovery in oil prices has also given Kazakhstan’s macro-fiscal indicators a lift, bolstering the country’s short-term prospects.

Risk scores for bank stability, economic growth, employment/unemployment, monetary policy/currency stability and government finances have all been upgraded this year.

GDP declined in real terms by 2.6% in 2020 to end three years of growth, averaging just above 4% per annum, as the economy was hit by two Covid-19 lockdowns undermining services sector activity.

The economy continued declining in the first quarter of 2021, but at the reduced pace of 1.5% year-on-year, with GDP turning positive, growing by 0.7% y/y in the first four months of the year as the economy picked-up in April, after an easing of restrictions.

Economists at the European Bank for Reconstruction and Development (EBRD), also contributing to Euromoney’s country risk survey, note that economic growth has been underpinned by strong construction sector growth, as well as improvements to agriculture, manufacturing and trade.

The transport and mining sectors are lagging, the latter affected by compliance with Opec+ oil production agreements, but overall a stronger recovery for Kazakhstan is now predicted by the EBRD compared with a more cautious outlook in September 2020.

The EBRD’s June projections show 3.6% real GDP growth for 2021 and 3.8% for 2022, with macro-stability enhanced by an exchange rate supported by oil prices now exceeding $70/barrel.

These improvements have led to EXIAR’s Fedotkin, the EBRD’s economists and other Kazakhstan analysts upgrading economic risk factors.

“Oil prices have surged some 50% this year and the oil and gas sector remains the cornerstone of the Kazakh economy,” says Fedotkin.

The improvements to oil prices and brighter economic outlook have led to the authorities adjusting the state budget as recently as in May.

“Along with a stronger real GDP growth projection for 2021 of 3.2% instead of an earlier forecast of 2.8%, the base average annual oil price, used in the state budget, has also been increased from $35 per barrel to $50 per barrel,” says Fedotkin.

“As a result, the projected budget deficit is now expected to be around 3.5% of GDP, markedly less than the initial assumption of 9%.”

Kazakhstan’s short-term improvement is impressive, but its longer-term trend is even more so. The country has gained seven points in the survey during the past five years and by more than eight over a decade.

If it continues, it could leave Russia well behind.