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EURASIA 2009: Falling commodity prices to hit region hard
Clare Nuttall in Almaty
February, 2009
The Eurasian economies are expected to see a slowing of growth in 2009, as a consequence of falling prices for oil and other commodities.
The Kazakh government forecasts that the economy will grow on average by between 2.7% and 4.1% a year from 2009-2013. GDP per capita is projected to reach just over $13,000, considerably lower than the earlier forecast of $15,737. This follows almost a decade during which GDP growth aver¬aged just under 10% a year. The much lower forecasts are a consequence of the dramatic decrease in the prices for oil and other commodities, which make up the bulk of Kazakhstan's exports, since mid-2008.
In Uzbekistan, the European Bank for Reconstruction and Development (EBRD) forecasts a gradual decline in GDP growth from 9.5% in 2007, to 8% in 2008 and 7% in 2009. Azerbaijan, which saw a stunning 23.4% expansion of the economy in 2007, has a growth forecast of 17% in 2008 and 15% in 2009.
Countries such as Kyrgyzstan and Tajikistan, which are less dependent on commodity exports, have also come under pres¬sure due to the slowdown in their trading partners - chiefly Russia and Kazakhstan. The smaller CIS economies are also expected to see a contraction in remittance payments from migrant workers abroad. Only Turkmenistan appears exempt from the international downturn, with growth remaining at a steady 12% in 2008 and 2009.
The Caucasus suffered a setback when war broke out between Georgia and Russia over the separatist South Ossetia in August 2008. The consequences for Georgia were the most severe, but Armenia's economy has also been affected, while oil exports from Azerbaijan were temporarily cut.
Kazakhstan
Visor Capital forecasts a "rapid slowdown but no crash" for the Kazakh economy. "We lower our real GDP growth forecast to 3.1% on year for 2008 from 4.9%, and to 2.5% from 6.0% for 2009 as the third-quarter results were very poor implying 1.2% on-year growth of quarterly GDP. This is a significant slowdown, given that in 2007 real GDP growth was 8.7% and 10.5% in 2006. As such, there is a risk of recession in 2009," Visor writes.
The international credit crisis affected Kazakhstan's banking sector from July 2007, since banks had borrowed heavily on international capital markets. This also resulted in the bursting of a speculative bubble in the residential property market, which has still not recovered.
Until mid-2008, it appeared the crisis would have little impact on the wider Kazakh economy. Given the country's rich endowment of natural resources, its long-term growth path seems assured. The International Monetary Fund forecasts GDP growth of 113% between 2007 and 2013.
However, when the international crisis deepened after Leh¬man Brother's collapse in September, Kazakhstan started to suffer from falling prices for oil and other commodities, which account for the bulk of its exports. Kazakhstan's metals and mining companies have started to stockpile production and reduce output in response to low demand and pricing.
In light of lower-than-expected revenues for the national bud¬get, the government has been revising its three-year budget
plans, basing its 2009 budget on an oil price of just S40 bl for 2009 and $50/bbl for the next two years. Transfers from the National Fund will be increased to make up some of the short¬fall. Spending cuts are expected, although the government has indicated it will maintain social spending.
The government has responded to the crisis with a package of measures directed at the banking and other sectors. The stabi¬lization plan was approved November 25. and will be a major factor in Kazakhstan's development through 2009.
The programme's main purpose is to soften the negative socio- or economic effects of the economic contraction in Kazakhstan, and ensure a basis for future economic growth. Of the KZT2.2 trillion ($18.3bn) cost of the programme, $8.3bn will come from the state budget and $10bn from the National Fund.
The National Wellbeing Fund, formed through the merger of state holding company Samruk and the Kazyna national investment fund, will play a key role in implementing the stabilization programme.
The main elements of the programme are:
- Financial sector ($4bn) - Samruk-Kazyna to buy shares and subordinated debt from Kazakhstan's largest banks. Stressed assets fund to be set up;
- Real-estate sector ($3bn) - Samruk-Kazyna to manage pension funds loaned for priority investment projects financing, purchase apartments in Astana and Almaty and make discount-rate mortgages available to homeowners;
- SMEs support ($lbn) - Samruk-Kazyna to provide funding through banks, of which 70% will go to existing projects and 30% to new projects;
- Agriculture ($lbn) - KazAgro Holding to finance 11 projects in the agriculture sector;
- Infrastructure and industrial projects ($lbn).
In November, the government had finalised terms for the injection of $3.5bn into the country's four largest banks -Halyk, BTA, Alliance and KKB. It is not yet clear how the remaining $1.5bn earmarked for the sector will be spent. After Kazakhstan's number five and six banks - BankCenterCredit and ATF Bank - turned down the government offer, it may be invested into other top-10 banks.
There are various risks for the sector to face in 2009. In their annual financial stability report issued in December, the National Bank of Kazakhstan and the financial regulator AFN have identified the key risks as: increasing credit risk; higher provisioning levels; and, pressure on profitability due to slower economic growth and worsening company financial conditions while, combined with the banks' limited capacity to optimise costs, will require higher capitalisation levels.
2008 saw several investments by foreign banks into Kazakh¬stan. These include Kookmin Bank's investment in Bank CenterCredit, VTB setting up of a representative office, and Raiffeisen International's announcement that it plans to set up in a Kazakhstan subsidiary (though it has not yet done so). On the investment banking side, Russia's Troika Dialog entered the Kazakhstan market.
To read more on Eurasia's 2009 outlook, go to www.businessneweurope.eu/cat516/2009_Outlooks