Kazakhstan’s multi-faceted risk profile is buffeted by unrest

Troops took to the streets in Almaty during protests over rising fuel prices in January. Photo: Reuters

Instability in Kazakhstan occurred just as Euromoney was conducting its final quarterly risk survey of 2021, and invariably it led to a downgrading of its country risk score.

The fallout has continued too, with president Kassym-Jomart Tokayev seeking to shore up his authority at the expense of loyalists to his predecessor Nursultan Nazarbayev.

This has seen the mayor of Almaty and former prime minister Bakytzhan Sagintaev ousted in favour of Erbolat Dosayev, who was hitherto the chair of the National Bank (central bank).

Askar Mamin was removed as prime minister and replaced by Alihan Smaiylov, who previously served as first deputy, and as minister of finance until 2020. The experienced Karim Massimov, twice a former prime minister and head of national security, was arrested for treason.

Relatives of Nazarbayev have meanwhile been dismissed from various bodies, and Nazarbayev himself has come out confirming Tokayev has power while denying there is any internal conflict.

Stability restored

Whether the violence that erupted in early January – ostensibly over rising fuel prices – was indeed rooted in an internal power struggle or orchestrated by outside actors, as some have suggested, the situation has since stabilized with the temporary assistance of 2,000 troops from the Moscow-inspired Collective Security Treaty Organization.

It certainly cast a spotlight on the country though, rattling investors, with ECR contributor Lilit Gevorgyan, senior economist and country risk analyst at IHS Markit, referring to “newly emerged downside risks”, and noting that after three decades of stability Kazakhstan has entered the uncharted waters of redistribution of political power and economic influence.

The intra-elite struggle will not dissipate easily and some of the tensions will simmer 

 - Lilit Gevorgyan, IHS Markit

Prophetically, she states further that “president Tokayev perhaps won the battle, but not the war,” while adding that several influential people who have been removed from their political posts still yield great economic influence.

“The intra-elite struggle will not dissipate easily and some of the tensions will simmer, bearing the risk for further instability.”

Another risk is the fact that Russia has emerged as a significant player, despite the troop withdrawal. Also, considering the deep social discontent, government outlays are expected to increase in the near term, delaying efforts at fiscal prudency.

Despite this, Gevorgyan and other risk experts have not been drawn into dramatic downgrades. The increased risk is measured, underwhelming even, on a weighted multi-factor basis, which means Kazakhstan is still rated a similar risk to countries such as Peru and Honduras:

Partly this reflects the fact that Kazakhstan’s main risks were always incorporated into its profile, thus already making it a low-ranking, tier-3 sovereign in Euromoney’s five-tier categorization, which is a far cry from other investor options in the top two tiers.

The country after all has no semblance of western democracy and a well-established history of autocratic practices that invariably include rounding up critics. That much has never changed and nor does it seem likely to.

Dampening the risks

It also has attributes that are unlikely to be washed clean from its risk profile by temporary instability. One is a favourable attitude towards foreign investment built on a desire to punch above its weight on the international stage, cream off technical know-how, and keep on earning revenue.

Another is a mostly favourable set of macro-fiscal metrics, underpinned by already sizeable sovereign wealth fund assets that have been sensibly squirrelled away on the back of natural resource exploitation.

The country has foreign exchange reserves covering eight months’ worth of imports, and wealth fund assets covering more than a year’s worth.

Improving commodity prices amid a global economy firing up from the pandemic lockdowns encouraged risk experts to upgrade their scores for economic factors last year as the corresponding political risks increased.

Real GDP was seen growing at around 4% this year on the heels of a 3.7% expansion in 2021, according to the IMF’s latest Article IV report in November, narrowing the fiscal deficit to 1% of GDP. The gross public debt is just 25% of GDP with a balance of payments current account deficit of less than 2% of GDP, all highlighting low macroeconomic risks.

Vigilance required

Still, the unrest highlighted the vulnerability of the currency to short-term capital flows, and it jolted the recovery, even if temporarily.

Inflation is still a problem too, remaining above 8% for a seventh month in succession in January. Rising food and fuel prices, and the government’s attempt to lift the cap on liquefied petroleum gas which sparked the protests, have highlighted this.

Dmitri Fedotkin, director of macroeconomics and country risk research at the Export Insurance Agency of Russia, says Kazakhstan fared comparatively well during the pandemic in 2020 and it was on a recovery path in 2021, helped by supportive commodity prices and adequate levels of state and private investment.

These events, he admits, suggest that even comparatively decent indicators sometimes may be deceptive.

The latest protests were sparked by a mixture of both economic and political grievances 

 - Dmitri Fedotkin, Export Insurance Agency of Russia

“The latest protests were sparked by a mixture of both economic and political grievances, and this may be partially reflective in the average economic and political assessment scores for Kazakhstan,” he says.

“It is worth noting that these average scores in some cases can be based on rather polar scores – for instance, where a country's good government finances score is offset by sub-par corruption score.”

From this viewpoint, the detailed breakdown of the political assessment scoring suggests what the priorities might be for the Kazakh authorities in the short term, he adds.

Indeed, what happens now will be crucial, as it could well set the tone for investors for several years to come.