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09/12/07

Kazakh economy top performer in Central Asia


Kazinform

The city of Almaty, famous for its fragrant apples, is about to be lost in the shadow of an ever-increasing number of skyscrapers.

Category: Economy
Posted by: admin

The increases in income, attributable to the hike in worldwide oil prices, have provided a significant stimulus to the Kazakh economy. The city now competes with London and New York in terms of inflated real estate prices and escalating living standards. Astana, the new capital, and other cities, too, have also been experiencing this trend.

The number of Kazakh billionaires on Forbes' list has increased to five this year. More and more Kazakh people invest in foreign funds every day. Also, Kazakh investments, particularly in the energy and banking sectors, are said to have hit the $20 billion limit. During the last two years, shares of 18 Kazakh companies have been listed for the first time on the London stock exchange.

The salaries of $30-40, given in the post-Soviet Union dissolution era, have long been history. Per capita income has surged to $5,000.

As new oil pipelines are built and the country exports more and more oil, more income will enter the country. And obviously, Kazakhstan will be in a better position than it is in now. There will more building construction and more luxury cars will populate the streets of Almaty. Per capita income, which has increased by fivefold since 1999, may rise to $25,000-30,000 in the near future if this trend continues, Kazinform cites KADİR DİKBASH, Todays Zaman.

A short history of change

Kazakhstan experienced troubles in the 1990s characterized by the dissolution of the Soviet Union, and its economy showed a significant decline until 1995. With the settlement of the free market economy and the full functionality of the new republic along with all its institutions, a new era began. The economy became more vigorous as development plans were implemented over time. The shrinking of the economy halted and growth began.

As one of five countries with shores on the Caspian Sea, Kazakhstan has rich oil reservoirs both in the sea and on land. In addition to oil and natural gas, the country has rich gold, silver, uranium, barite, iron, coal, chromium, copper, lead, zinc and phosphorous resources along with 1,200 more mineral deposits.

Among the Commonwealth of Independent States (CIS), Kazakhstan has shown the best economic performance and conforms best to the requirements of a liberal economy. Thus, it is known as the most liberal economy in Central Asia. Kazakhstan has secured an average growth of 10.3 percent since 2000. Its economy has made the leap from $18 billion in 2000 to $77.9 billion now, and its current per capita income is $5,083.

The Kazakh economy continues to show impressive performance. Economic growth was 10.6 percent last year. The growth rate is 10.2 percent for the first half of this year.

Oil exports rose to 57 million tons

Kazakhstan's discovered oil reserves amount to 32.5 billion barrels while its natural gas reserves are 3 trillion cubic meters. However, the actual reserves of the country are estimated to be well above these figures.

In 2005 and 2006, Kazakhstan was among the oil producers that increased their oil exports the most. In 2006, 64.8 million tons of oil were produced while 57.1 million tons of oil were exported. In 2006, the natural gas production was 27 billion cubic meters while exports amounted to 7.8 billion cubic meters.

Although Kazakhstan has significant natural resources, its lack of access to maritime routes has proven problematic. Also, it is dependent on Russia in terms of energy exports. For this reason, one of the basic targets of Kazakhstan is to free itself from dependence on a single country for energy exports and develop new alternatives. The main pipeline used for oil exports is the Caspian Oil Pipeline, which passes through Russia. In May of last year, Kazakhstan started to use the Chinese pipeline in addition to it. Kazakhstan is also seeking inclusion in the Baku-Tbilisi-Ceyhan (BTC) pipeline project.

Record increase in investments

The high rates of increase in fixed capital investments ensure the sustainability of the country's economic growth. According to data from the Interstate Statistical Committee of the Commonwealth of Independent States (CISSTAT), the annual average growth in investments between 1999 and 2006 hit a record high of 23.5 percent. As one might guess, investments focus on energy and construction sectors. Energy also has the lion's share in the fixed capital investments, which increased by 11.6 percent in the first seven months of this year. According to the latest data from the Kazakh Statistics Agency, 30.1 percent of the investments amounting to 1.4 trillion tenges (about $12 billion) were in the oil and natural gas sectors. Twenty-eight percent was in the construction and real estate sectors, while 11 percent came in the transportation and communication sectors and 10.6 percent was in the manufacturing sector.

Inflation has been under tight control thanks to the successful policies implemented since the mid-1990s. However, the high growth rates and increasing oil prices seen in recent years have fueled price increases in goods and services. The foreign capital inflow, the increased borrowing opportunities and the widespread use of loans have also influenced price increases. The consumer prices based inflation rate was 8.6 percent last years and it decreased to 7.9 percent as of June this year. One US dollar was 138 tenges in December 1999, 156 tenges by the end of 2002, and is now 122 tenges.

Due to the intense inflow of foreign currency, the foreign currency reserves increased from $7.1 billion in 2005 to $19.1 billion in 2006. They are expected to exceed $25 billion by the end of this year. The foreign currency reserves amounting to $16 billion deposited at the National Oil Fund are not included in these figures.

Kazakhstan is one of the countries that has received the highest capital inflow in recent years, not only among the CIS countries, but also in the world. The majority of investments were for energy projects. In 2006, the direct foreign capital investment was $10.4 billion. The aggregate investments made between 1993 and 2006 were $51.2 billion. US companies take the lead in terms of foreign investments with 26.4 percent of direct foreign capital investments. Turkish direct investment accounts for 1.95 percent of the total foreign investments, amounting to $1 billion.

Foreign trade increases by folds

Because of the production structure in Kazakhstan, the country generally exports raw materials and semi-finished goods. Some 73.8 percent of its exports consist of mineral products, particularly oil. Chemicals account for 3.4 percent of its exports while foodstuffs correspond to 2.4 percent of its exports. The primary import item is machinery with 43.3. percent of the total. It is followed by non-iron metals at 14.7 percent, mineral products with 14 percent, chemicals at 11.6 percent and foodstuffs at 7.2 percent. Its most important trade partners are the European Union (particularly Germany, the UK, Italy, and the Netherlands), Russia, Switzerland, China, the US, Turkey, South Korea, Uzbekistan and Ukraine. Russia currently has the biggest share in Kazakh imports. Russia is also an important importing country for Kazakhstan.

The biggest risk for Kazakh foreign trade is its vulnerability to imbalance. Due to the fact that oil, natural gas and metals have an important share in export income, and that fluctuations may be seen in worldwide prices of these materials, Kazakhstan is exposed to both positive and negative effects. For instance, the decrease in world energy and metal prices in the 1998 crisis affected Kazakhstan deeply.

Reviving trade with Turkey

Turkish-Kazakh relations have been developing since 1991 when Kazakhstan gained its independence, but they were seriously undermined in 2001. More recently, however, important developments have made their mark in relations. The volume of trade between two countries which exceeded $1 billion in 2005 is expected to be more than $2 billion this year.

The development in the first half of 2007 is striking; Turkey's exports to Kazakhstan rose $500 million in a 68.2 percent increase while its imports from this country increased to $564 million in a 62.1 percent increase.

The products Turkey sells to Kazakhstan include, in order of quantity -- machinery, plastics, electrical equipment, steel merchandise and furniture -- while Turkey imports copper and copper products, mineral fuels, iron and steel, zinc and zinc products from Kazakhstan.

Under the customs union agreement among the CIS countries, Kazakhstan does not impose a customs tax on products from the Russian Federation, Kyrgyzstan, and Tajikistan. Kazakhstan also has preferential trade agreements with Ukraine, Moldova, Uzbekistan and Turkmenistan. Turkish goods are generally perceived as quality goods. The greatest obstacle before the development of bilateral trade relations was geographical distance and transportation problems.

Turkish investors' presence in non-oil sectors

Kazakhstan is one of the Central Asian countries that Turkey invests in heavily. According to official Kazakh figures, the direct investment from Turkey in Kazakhstan amounts to $1 billion. The biggest Turkish investment is the Kazakturkmunay (KTM) oil exploration and drilling company, which is a partnership between the Turkish Petroleum Corporation (TPAO) and Kazakoil. Turkey invested $273 million in the project between 1994 and 1999.

Large projects have been taken on by Turkish contractors; they have constructed public buildings, energy facilities, pipelines, shopping centers, highways and plants. In particular, about 70 percent of Astana has been built by Turkish contractors. The aggregate projects undertaken by Turkish companies were about $2.6 billion in 2005. With an increase of about 1.2 billion last year, they rose to $3.9 billion; they are expected to exceed $5 billion by the end of this year.

While the Turkish investments in Kazakhstan continue, there has also been increasing Kazakh capital inflow to Turkey in recent years. Kazakhstan informed Turkish authorities of its intention to establish an oil refinery in Ceyhan. Meanwhile, the joint venture that was awarded the privatization tender of Petkim, the single petrochemicals company of Turkey, includes Kazakh companies. If the awarding of Petkim's privatization tender to the joint venture group, the composition of which has been heatedly discussed in Turkey, is approved, and the Kazakh plan to establish an oil refinery in Ceyhan is implemented, the Kazakh capital inflow to Turkey will immediately reach several billion dollars.

Risks and doubts

Despite the Kazakh economy's continuing high performance, it has several weaknesses, particularly characterized by the relatively high inflation rates. While the foreign trade surplus is high, the current accounts deficit is increasing, though at moderate rates. Interestingly, although it increases its energy production and makes increased exports, Kazakhstan, unlike other energy exporting countries, continues to have deficits in its current accounts. While as the net energy exporters within the CIS, Russia, Azerbaijan, Turkmenistan and Uzbekistan have current account surpluses, Kazakhstan has current account deficits, though at a level that constitutes only 1.4 percent of its GNP. Meanwhile, the rate of increase in imports has exceeded the exports considerably in 2007. Rapidly rising oil prices imply that Kazakhstan can easily maintain its surplus position.

High levels of foreign currency inflow to the country create problems in monetary policy implementation. Although official foreign currency reserves are increasing, the foreign liabilities of banks have multiplied by two-fold. Banks tend to obtain foreign loan facilities with lower interest rates so they can market them with high interest rates. There are also false increases in real estate prices.

Although this situation is similar to the one experienced in Turkey, the Kazakh case is more salient. While the inflation rate is about 8 percent, the value of the tenge against the US dollar continues to increase.

With intense inflow of foreign currency, the foreign currency reserves increased from $7.1 billion in 2005 to $19.1 billion in 2006. They are expected to exceed $25 billion by the end of this year. The foreign currency reserves amounting to $16 billion deposited at the National Oil Fund are not included in these figures.

Actually, the risks in the face of the country's economic performance are not too different from what many other economies have experienced. The recent performance of the country, the determination to maintain free market conditions and the coherent policies being pursued signify that the country may not have great losses even if world energy prices decrease.

Having increased its economic welfare at the highest rate among former Soviet republics, thanks to increasing energy prices, Kazakhstan's next target is to be among the 50 biggest economies of the world. This target seems within reach, considering this young and dynamic economy of the Central Asian steppes.