Kazakhstan Update: The Twin Peaks Challenge

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Strong growth based on oil. Kazakhstan’s economy grew by 4% YoY last year (from 1% in 2016) and looks set to replicate that strong growth again this year. The key driver of last year’s recovery and this year’s expected growth is the combination of rising oil output and the oil price recovery.
Oil may pay for Nurly-Zhol. Despite last year declaring that the country would prioritize the Nurly-Zhol diversification strategy, the government is much more focused on an energy development strategy. The Oil & Gas Strategy is the greater priority, as it will deliver economic recovery and growth over the medium term and, hopefully, provide the resources and time to allow the Nurly-Zhol plan to be developed. These are the twin priority programs.
Operation Successor. There is a lot of discussion about who will succeed Nazarbayev in 2020 but almost nothing has been done to show a succession process is underway. Instead, the president is consolidating his position and engaged in a number of social and nationalist programs, which consolidates his own position. He will be 80 in 2020 and may run for another term or, he may nominate a successor close to 2020.
Tenge is tracking the ruble. Although the tenge did not follow the recent ruble collapse (after the US sanctions) the NBK will keep the tenge-ruble rate in the 5.3-5.6 range so as not tom lose competitiveness with Russian producers and suppliers. The high oil price should keep the rate at the upper end of the range.
Investment themes. There are a number of very attractive investment themes for strategic investors. These are based on both the ambitions of the Oil & Gas Strategy and Nurly-Zhol as well as those associated with the expanding BRI rail network and the new Astana Financial Center. The president’s recently announced five-step social program should also expand demand for housing and related services.
Euroclear-ClearStream. Kazakh local debt should be clearable by Clearstream in July and by EuroClear later this year. That will boost foreign investor interest in local debt from the current 2% level. Local debt is also attractive because of the aggressive easing cycle, which the NBK is engaged in. The benchmark rate has more to fall.
Equities are outperforming. Kazakh equities have been amongst the best performing in the world for the past two years. A new bourse, in Astana, plus a new online retail platform and a commitment to stick with the privatization plan, should help provide further support.
S&P affirms and warns. Rating agency S&P has affirmed the country’s sovereign rating at BBB-, with a stable outlook. But S&P warned about unresolved problems in the banking sector.