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SpirE-Journal 2013 Q3

Kazakhstan: A hidden gem in Central Asia

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Kazakhstan: A hidden gem in Central Asia

In medieval times, central Asia lay at the heart of Asia’s economy. Its states grew rich from being at the intersection of trade routes connecting China, India, the Middle East and Europe. The rise of sea trade in the 20th century robbed it of this status. But Central Asia is now a fast-growing emerging market rich in natural resources such as energy and arable land, with Kazakhstan in the ascendant as the region’s largest economy. But while the potential for doing business in Kazakhstan is exciting, challenges remain.

Central Asia – The “New Silk Road”

A vibrant region with a rich history of culture, trade and economic prosperity, Central Asia is attracting investors from all over the world. The region has a number of economic advantages: its strategic location at the cross-roads of much larger economies like China, India, Russia and Turkey; its abundance of natural resources; and its high growth potential from the current low base.

In recent years, Kazakhstan, Azerbaijan, Georgia, Armenia, Uzbekistan, Turkmenistan, Tajikistan, Kyrgyzstan and Mongolia have been defined as the “New Silk Road” – with the promise of economic growth implied.

The “New Silk Road” is a re-emergence of the ancient Silk Road which served as a network of trade routes connecting Europe, Africa and Asia for the trading of valuable commodities such as silk, spices, tea and precious metals for more than four thousand years. Today’s “New Silk Road” is exporting high value commodities, such as oil and gas, to economies across Asia.

Kazakhstan, Azerbaijan, Georgia, Armenia, Uzbekistan, Turkmenistan, Tajikistan, Kyrgyzstan and Mongolia have been defined as the “New Silk Road”.
Kazakhstan – Central Asia’s crown jewel

Kazakhstan is the largest country in Central Asia and the ninth largest country in the world; occupying a total of 2,717,300 square kilometers with a population of 15.9 million as of 2012. After gaining independence from the Soviet Union in 1991, the country underwent massive economic restructuring.

Under Soviet rule, Kazakhstan suffered what can be termed benign neglect. Some investment was made in infrastructure, but often for purposes related to Soviet national security. Education and enterprise was not developed to a high-quality, with very few of the USSR’s high value-added goods producing industries being sited in the Central Asian region.

Today, while Kazakhstan is still an early developer in global terms, it is undoubtedly the economic leader of the Central Asia region.

The majority of securities listed in the region are traded via the Kazakhstan Stock Exchange (KASE), which has the biggest market capitalization and the most internationally accessible listed securities among regional securities exchanges. The government’s plans to launch three ‘People’s Initial Public Offerings (IPOs) in 2013, as well as eight additional listings by the end of 2015, will further attract foreign and domestic investment.

What does Kazakhstan have to offer?

Kazakhstan is slowing emerging as a viable investment destination. Some of the reasons for this include:

Robust economic growth

The economic outlook for Kazakhstan appears positive, with projected annual GDP growth averaging 5.9% from 2013 to 2016. This healthy growth outlook is largely due to the expansion of the oil industry and the growth of a few non-oil sectors.

Currently, Kazakhstan is ranked 12th in the world in terms of proven reserves of oil and condensate. The government has plans to further develop its strongest industry – the oil industry – through expanding the capacity of current gas pipelines, constructing new pipelines and process facilities, as well as developing a gas-based power generation industry.

Industry experts have speculated that large, unexploited oil and gas deposits lie under the Caspian Sea. Large-scale exploration projects are underway to unlock these deposits. Thanks to this prospect, the country’s oil industry is likely to remain the key driver of the country’s economic growth.

Another contributor to the positive economic outlook is the growth of non-oil sectors. To diversify risk, the government is working towards reducing the economy’s dependence on oil in the long term. Key industries that have been earmarked for development include financial services, infrastructure and construction. Investment in these industries will help to increase the fixed capital stock, boost consumer spending and drive the country’s economy.

Favorable business environment

In recent years, Kazakhstan has won plaudits for creating a favorable business environment. According to The World Bank, Kazakhstan was ranked 47th out of 183 countries for ease of doing business ; a jump of 11 places jump from 2011. This improvement was driven by progress in the areas of “Facilitating Investors” and “Paying Taxes”.

The Kazakh government adopted a “National Plan for Attracting Investment” in 2011. Some of its measures included the simplification of visa and customs clearance procedures and the establishment of special service centers for foreign investors under regional municipal authorities. Besides, the government has lowered the headline corporate tax rate from 30% in 2009 to 20% in 2010. This figure is expected to fall further to 15% in 2014.

Political stability

Since gaining independence in 1991, Kazakhstan became a constitutional republic with a strong focus on national identity, democracy and political stability. Equal rights and equal opportunities are given to all, regardless of nationality, so as to create a harmonious multi-ethnic environment.

In his address outlining “Strategy Kazakhstan – 2050”, the Kazakh President shared that one of its key goals was to maintain a successful multi-ethnic and multi-confessional society. This would foster the political stability that is necessary to attract foreign investors.

Strategic location

Kazakhstan is strategically situated in the middle of Europe and Asia, almost equidistant from both the Atlantic and Pacific oceans. Most importantly, it is located at the crossroads of Europe and Asia, thus guaranteeing a role in trade. The recent launch of a new railway through Kazhakstan linking China to Europe strengthens this advantage.

Natural resources

One of the biggest competitive advantages Kazakhstan has would be its rich abundance of natural resources. Out of the 110 elements present in the Periodic Table, 99 elements can be found in Kazakhstan while 60 of them are already being extracted and used.

Kazakhstan is one of the richest countries in the world in terms of energy resources, such as petroleum and natural gas, as well as mineral resources such as titanium, magnesium, tin, uranium, gold and other color metals.

Headline corporate tax fell from 30% in 2009 to 20% in 2010; it is set to drop to 15% in 2014.
Where to invest – Emerging sectors

A few sectors are now fast-emerging as business opportunities for export sales as well as investment in Kazakhstan.

Construction

The construction industry presents many opportunities for foreign investment and partnerships. As part of the Affordable Housing 2020 Program, the government plans to commission 1.3 million square meters of housing annually, from 2015 to 2020. This would translate to an investment of USD5.6 billion in the construction industry each year.

Banking and financial services

Despite Kazakhstan’s banking sector remaining relatively subdued throughout 2013, the government is taking steps to restore confidence in the banking sector.

One positive development is the quasi-sovereign restructuring of BTA Bank, where a subordinate loan mechanism and credit enhancement without direct credit support was provided. Such developments are likely to alleviate investors’ and depositors’ concerns.

Nominal loan growth is expected to increase from approximately 10% in 2012 to slightly below 20% in 2013. As consumer spending and construction of residential and commercial buildings rise, bank loans will increase as well.

Infrastructure

The government has been investing heavily to upgrade Kazakhstan’s infrastructure – drawing a parallel with government moves in Myanmar, Vietnam and India. By 2030, total infrastructural investment is forecasted to amount to more than USD25 billion. 40% of the sum will be used for railway transportation, 23% for highways construction, 25% for the telecommunications sector and 12% for air and water transport systems. Growth potential in this sector is expected to remain high.

Challenges in investing in Kazakhstan

While Kazhakstan offers great investment opportunities, it is important to understand the challenges present so as to successfully penetrate the market.

Poor infrastructure

Just like many former Soviet Republics, one of the biggest challenges Kazakhstan faces is its poor infrastructure. This is especially so in the areas of transportation and telecommunications.

In terms of transportation networks, Kazakhstan lacks a modern highway system and railway network to transport freight in an organized and reliable manner. The telecommunications services are also incongruent with the rapid economic growth of the country. The coverage for internet and mobile phone services is limited; some parts of the country are still using outdated telecommunications equipment left behind from the Soviet era. Due to poor infrastructure, there has been much delay in the flow of goods and materials, as well as increasing difficulty for suppliers and distributors to communicate with each other across geographic distances.

Corruption

Corruption remains prevalent despite the government’s anti-corruption campaigns and dismissal of guilty bureaucrats. According to Transparency International’s Corruption Perceptions Index for 2012, Kazakhstan was ranked 133th out of 183 countries. This is a 28-place drop from 2010.

Shortage of skills

Skills shortages are another major challenge in Kazakhstan. According to the Kazakh Statistics Agency, skills shortages in the country are on the rise. As of January 2013, the biggest labor shortage has been observed in the manufacturing industry, where there is a shortfall of approximately 10,000 workers. This is followed by the construction industry as well as the health and social services sector, with a shortfall of approximately 5,000 and 3,000 workers respectively.

The government is well-aware of the high correlation between skills and sustainable growth. Financial assistance policies have been put in place to help more students enroll into Kazakhstan’s private institutions, where they can be equipped with technical skills. Nevertheless, these problems remain acute and pose a challenge, as investors may need to resort to foreign labor to mitigate the issue.

According to Transparency International’s Corruption Perceptions Index for 2012, Kazakhstan was ranked 133th out of 183 countries.
Conclusion

Undoubtedly, Kazakhstan is still grappling with the challenge of creating a transparent and effective business climate to draw in foreign investors. Challenges stemming from its Soviet era past, such as poor infrastructure and high corruption, remain prevalent – making it necessary for companies to undertake cautious planning before executing any business plan in the country.

In particular, companies should reach agreement with the government on arrangements for securing manpower before inking any investment deals.

Despite the challenges, the investment outlook remains positive. The Kazhak government has shown the political will to meet these challenges. Since 1991, restructuring efforts have ensured strong economic growth, demonstrating the country’s ability to transition to a market economy. Most importantly, Kazakhstan’s political stability, abundance of resources and favorable business environment make it an ideal investment destination for companies searching for untapped opportunities.

As the economy continues to open up, more foreign firms are expected to penetrate the Kazakhstan market. Those in the construction, infrastructure, energy and mining industries should take a closer look to ensure that late market entry does not shut them out of future deals.

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