Battling through a severe credit crunch
Overview:
While the medium-term economic outlook for Kazakhstan remains extremely favourable it continues to be one of the economies hardest hit by the global financial crisis. Its excellent record of economic growth in the past decade has been driven not only by increasing oil and gas production but by large external borrowing on the part of the private sector. With these external sources of financing less readily available the economy has slowed sharply and the financial sector undergone considerable stresses. The authorities have been well placed to stabilise financial markets and have acted decisively to do so. Nevertheless, a further period of low growth is likely while some key imbalances are rectified. Attention can then return to the large increases in oil and gas production to come on-stream over the next decade.
Recommendation:
In the long-term, increasing oil and gas revenues should allow for an appreciation of the Tenge. Interest rates are also relatively high and should remain so given Kazakhstan’s high equilibrium growth rate. However, the central bank (NBK) is focused on Tenge stability for now against the US$ and investors will remain wary of further external shocks. We are neutral on local interest rates.