ADB: Despite challenges, Kazakhstan can ride 2010 recovery to growth in 2011

    By Kevin M. Baerson
    Yesterday, the Asian Development Bank (ADB) predicted “steady, moderate growth and a comfortable current account surplus” for Kazakhstan’s economy in 2011 — but not without cautions. The anticipated growth could be tempered by limited credit availability from restructured but still weak banks, and rising inflation.
    ADB made its predictions in its much anticipated 2011 economic forecast for Asia. It believes that Kazakhstan’s economy will continue riding a “v-shaped” recovery that begun in the final quarter of 2009, and really took shape in 2010. As a result, ADB forecasts Kazakhstan’s GDP to grow by 6.5 percent in 2011, and 6.8 percent in 2012. Driven by “a revival in external demand, higher oil prices, and anti-crisis measures,” the recovery amounted to a full-year growth of 7.0 percent.
    Also impacting the recovery, ADB says, were improved global economic conditions, a revival in external demand for oil and minerals, and mounting oil prices, as well as anti-crisis measures put in place in 2009. Bank restructuring was also a positive factor, “though private credit to the economy stayed weak,” ADB reports.
    Kazakhstan’s solid expansion was driven by 9.6 percent growth of industry. Manufacturing expanded by 18.4 percent; and mining by 5.3 percent. Construction, which slowed sharply during 2007–2009, gained some momentum and grew at 1.0 percent in 2010. However, agriculture contracted by 11.7 percent in 2010 as severe summer droughts damaged about 10 percent of Kazakhstan’s arable land. With overall economic activity picking up, services expanded by 6.0 percent.
    On the demand side, after a lackluster 2009 and with the recovery beginning to take hold, private consumption and gross fixed investment grew by 7.5 percent and 7.0 percent, respectively, in 2010. Nonetheless, tight credit conditions may have held back further gains in private consumption and investment. After the slump of 2009, export volume grew by 9.5 percent in 2010, as demand for oil and other key exports picked up.
    As is often the case with rising consumption and investment, ADB reports that Kazakhstan’s imports grew by 6.5 percent in 2010. Still, the National Bank of Kazakhstan (NBK) must have been pleased that these increases did not lead to excessive inflation — overall average annual inflation reached 7.1 percent in 2010, well within NBK’s target of 6 – 8 percent.
    
    Keys to recovery
    What are the key factors for Kazakhstan to sustain 2010’s economic recovery? According to ADB, it lies in the recovery of agriculture after the sharp contraction of 2010; capital expenditure by the government on priority projects in its program for 2010–2014; a sustained global recovery; and an increase in oil demand and prices. However, ADB warns that “at the same time, banks’ continued fragility and steep oil and food price rises may undermine the global economy and work against Kazakhstan’s growth.”
    In 2011, ADB projects that construction will continue to face weaknesses “as a result of lack of credit and the inability of the private sector to raise funds in international markets on attractive terms.” Private consumption and total investment are expected to see continued growth in 2011 and 2012. “Credit availability will be an important factor if higher growth rates are to be achieved.”
    Like many other energy-dominated economies, however, higher oil prices and external demand will help boost consumption as well as investment in Kazakhstan’s oil sector. An increase in oil exports coupled with a doubling of the oil export duty to $40/ton from January 1^st of this year is adding to state coffers.
    Also, a concurrent shift from a personal income tax flat rate to a progressive income tax — with rates at 10percent to 20 percent — will also lift revenue. So will a decision to hold off reducing the corporate income tax rate, currently at 20%, until 2013. Both social and capital expenditure on priority projects will climb.
    “Overall, the government is likely to achieve its target of narrowing the fiscal deficit to 2.2 percent in 2011 and 1.7 percent in 2012,” says ADB. Accordingly, ADB projects that Kazakhstan’s current account balance will remain positive in 2011 and 2012, at 3.5 percent of GDP.
    As for the bigger picture with regards to trade, ADB foresees increases in both Kazakhstan’s import and export numbers. “Imports will increase on the back of higher private consumption and investment as banks become more willing to lend, and of government investment in a variety of priority projects,” the report states. Meanwhile, ADB believes, exports will “markedly increase further due to higher oil prices and stronger demand for oil.” All told, the trade surplus will be offset by the deficit on other components of the current account.
    While focusing on the upcoming fiscal year and near-term out years, ADB dedicates a portion of its forecast to address what Kazakhstan must do to successfully meet its long-term development and sustainability challenges. It urges Kazakh planners toward taking steps that “diversify the economy’s industrial base, lowering reliance on natural resources, and generating more balanced and equitable development constitute the premier development challenges.” In all regards, ADB notes, Kazakhstan must continue to increase its competitiveness.