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Kazakhstan is committed to the principles of multi-party democracy, pluralism and market economics in accordance with the conditions specified in Article 1 of the Agreement Establishing the Bank. The authorities have confirmed the importance they attach to these principles, and Kazakhstan has made some progress towards their implementation in the last three years, although challenges remain in both the political and economic fields: the strong presidency is not yet adequately balanced by the legislature or judiciary, corruption remains a significant problem, as recognised by the authorities, and the most recent parliamentary elections fell short of a number of international standards for free and fair democratic elections.
For most of the past decade, Kazakhstan’s macroeconomic performance was strong, as a combination of improving macroeconomic policies and structural reforms with high prices for its main exports – in particular oil and other commodities – contributed to rapidly rising incomes, robust consumption, increasing FDI inflows, and the emergence of an urban middle class. However, by the same time, certain vulnerabilities had built up, which became magnified by the global financial crisis starting in mid-2007. Kazakhstan suffered a twin external shock: it was one of the first countries of operation where banks were cut off from external wholesale funding, and a year later, in mid-2008, the country was hit by a second shock in the form of a very steep decline in oil prices. Economic growth, which had been fuelled in part by a credit boom and increasing commodity exports, consequently slowed down sharply, and is forecast to turn negative in 2009. This led to a severe banking sector crisis, prompting the state to intervene and nationalise or provide significant equity support for most systemic banks. The banking crisis has exacerbated problems in the real economy.
Yet the medium-term growth prospects for Kazakhstan remain good. The large Kashagan oilfield expected to start production in 2013. There is also potential for expanding uranium, copper and grain production. Yet, the crisis has laid bare the imbalances of Kazakhstan’s longer-term economic development, in particular the country’s reliance on commodity exports and the excessive reliance of the banking system on foreign wholesale funding, and significant risks related to the banking sector’s foreign exchange denominated exposures to unhedged borrowers. This has prompted the country’s leadership to declare economic diversification and the development of a new ‘financial model’ as its main priorities. In pursuing diversification, it will be essential to safeguard the fundamentals of the market economy against the growing tendencies towards an increased role of the state in the economy, reduced competition, and autarchy.
Thus, the key elements of the EBRD’s strategy in the coming post-crisis period will be to foster transition by assisting Kazakhstan in its efforts to promote economic diversification and moving towards a more sustainable model of financial development.
Strategic challenges
In its transition path Kazakhstan faces a number of strategic challenges, many of which have been emphasised by the economic and financial crisis:
- The crisis has highlighted Kazakhstan’s excessive dependence on primary industries and commodity exports. It is necessary to diversify the economy towards value-added industries, provided this diversification is based on economic rationale. With oil production expected to increase significantly in the coming years and with oil prices rising due to a gradual global economic recovery, the underlying economic tendencies – real exchange rate appreciation and human and financial resources flowing to the hydrocarbon sector – will make economic diversification even more challenging.
- The domestic financial sector has proved less developed and on a weaker foundation than previously thought. It is therefore of vital importance to reform the financial sector and to ensure that it emerges from the crisis with a sustainable business and funding model, which can provide sustainable and reliable financial intermediation and lending a lasting source of strength for the real economy. To this end, the banks will need to further develop their local currency funding base and lending products, and strengthen their balance sheets, transparency, and core competencies such as risk management. It is likewise important to further develop local currency and capital markets.
- To put sustainable development on a firm footing, the remaining transition gaps in the country’s infrastructure, including shortages and imbalances in power and energy, and transport bottlenecks, need to be filled.
An overarching policy challenge for the Government is to ensure that its efforts to address the impact of the crisis and the country’s medium term transition challenges do not result in undue and lasting interference in the economy and erosion of market principles. In the private sector, fair competition on a level playing field needs to be preserved and in some cases improved as economic incentives are re-designed.
Strategic directions
The Bank’s strategic directions reflect the immediate need to help Kazakhstan weather the crisis and get on the path of economic recovery, as well as to assist the country in confronting its fundamental transition challenges, as follows:
- Support for the corporate sector, including through addressing the immediate financing needs as part of our crisis response, while promoting economic diversification and innovation, including utilisation of best available technology, integration into the global economy (including through supporting inbound and outbound direct investment), best business and environmental practices, and energy efficiency. The Bank’s engagement with Kazakh corporate clients will be underpinned by the principles of integrity, transparency and good corporate governance. The EBRD will seek to engender these principles further through greater use of equity instruments.
- Co-operation with the authorities and other IFIs to help formulate a vision for the financial sector with the aim of achieving a sustainable financial model, including through the scaling back over time of the government’s involvement in the banking system. Through targeted investment, policy dialogue and technical assistance, the Bank will structure its work around that vision to help redress over-reliance on foreign wholesale funding and a still limited deposit base, FX lending to unhedged borrowers, excessive sectoral concentration of loan portfolios – in particular in real estate – and shortcomings in risk management, corporate governance and transparency. The banking sector will remain the primary conduit for channelling the Bank’s funds to SME’s and into energy efficiency and climate change projects. To allow the Kazakh banking system to fulfil this role in a sustainable way, the Bank will also seek to promote and support the development of local currency and capital markets in Kazakhstan through engagement with pension funds, increased involvement with non-bank financial intermediaries, and development of institutional capacity through both macro and micro (project-related) technical assistance. In particular, the Bank will continue to support the emerging private equity sector in Kazakhstan in order to ensure a sufficient supply of risk capital in addition to debt funding.
- Advance the transformation of the energy sector through implementation of the milestone principles of the Sustainable Energy Plan (SEAP). The EBRD will work to help redress energy imbalances and shortages through investment, conditional on clean technology, and emphasising sustainable energy, as envisioned by the SEAP.
- Support the development and transformation of infrastructure sectors, which is pivotal to further economic diversification and longer-term sustainable growth, while fostering commercial viability, competition, and private sector participation.
- Intensify policy dialogue, with the focus on three pivotal elements, as follows:
- Stabilisation of the banking sector and development of local currency money and capital markets;
- Implementation of Sustainable Energy Action Plan;
- Improvement of the business climate through Foreign Investment Council.
In keeping with its transition mandate, the Bank will concentrate its operations and policy dialogue on promotion of the private sector and seek to further the diversification of ownership in the economy. To that end, the Bank will selectively work with creditworthy state-owned companies if deemed consistent with the Bank’s transition objectives, i.e., by requiring commercial viability, good corporate governance, and best business practices, in particular when privatisation prospects are realistic, but also when, in the absence of an imminent privatisation plan, there are opportunities to promote reform . In doing so, the Bank will carefully balance its work with national companies to contribute to separation between ownership and regulation.
The Bank will continue to ensure that all of its operations in Kazakhstan are subject to the Bank’s 2008 Environmental and Social Policy and incorporate, where appropriate, Environmental and Social Action Plans.
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