Jan 16 2013

Greater freedom, greater investment

Greater freedom, greater investment Photo Credit:Reuters/Nursultan Nazarbayev
The Kazakhstan government will have to offer greater economic freedom to attract investment and diversify its economy.
Kazakhstan will have to offer greater economic freedom to attract investment and diversify its economy, according to Heritage Foundation.

However, the iron grip of supreme chancellor Nursultan Nazarbayev has impacted freedoms and turned the state into an oligarchy state, ruled by a handful of people.

Indeed, while President Nursultan Nazarbayev is secure and largely unchallenged after winning a fourth term in April 2011 and the ruling party controls parliament, Fitch ratings notes trouble could loom on the horizon.

"The long-term issue of succession is yet to be settled. Social tensions have surfaced in 2011-2012 and governance indicators are weak, increasing political risks," said the agency.

Kazakhstan, of course, is a strong oil exporter and is home to second largest reserves of crude oil in Former Soviet Unions, after Russia itself. The country has production of 1.6 million barrels per day, which is set to rise to two million by 2020.

Not surprisingly, more than half of government revenues and 60% of export revenues are from the crude production.

But like most petrostates, Kazakhstan has been unable to move from oil.

Although the government has tried to make economic diversification a priority, that effort has generally been at odds with the reality of a gradually increasing role of the state and oligarchic groups, says the Foundation.

"Kazakhstan and its neighbours still lack full regulatory transparency, efficient judicial institutions, and flexibility of labour laws. Corruption, non-transparent regulations, inefficient dispute-resolution mechanisms, rigid labor laws, high crime rates, and foreign exchange controls are all obstacles to corporate investment."

The Foundation ranks Kazakhstan 65th in economic freedom - the highest among its Central among its Central Asian peer group. Other moves such as reduction of tax rates from 30% to 20% in 2009 and lowering of value-added-tax, is a great move and needs to be matched by strong support to improve the country's economic and business environment.

The economy of Kazakhstan is poorly diversified. Despite the increased role of domestic sources of growth, it still strongly depends on prices of major export items, said Mr. Ahunbaev.

"Given a slowdown in the world's economic growth, especially in the economies of the European Union and China, it is evident that it will be difficult for Kazakhstan's industrial sector and its economy as a whole to avoid suffering from this slowdown."

"Business elites and government officials in Kazakhstan and throughout the region can attract additional foreign direct investment (FDI) if they take concrete steps... such as improving and upgrading the legal foundations of the Kazakh market economy, strengthening the court system and professionalism of judges and legal counsels, increasing efforts by the government to fight corruption and changing the local culture that tolerates it, and improving regulatory efficiency."

The International Monetary Fund says reducing the economy's dependence on oil remains a primary long-term objective of the government.

"To this end, the authorities are developing plans to diversify the economy by using a portion of oil revenues for investment in the non-oil sector and infrastructure development, including possibly through Public Private Partnerships (PPPs).

"Such partnerships can play an important role in promoting diversification, but it is essential to ensure transparent contracts to control contingent liabilities. Furthermore, chosen projects should be of high return, and consistent with fiscal sustainability and macroeconomic and implementation capacity. Successful diversification also requires continued improvements in the business environment."

In addition, the government is also loosening its fiscal policy. Last year, the government has raised the ceiling on transfers of oil revenue to the budget from the NFRK by a manageable USD1.2bn or 0.6% of GDP, but it maintains the ambition to consolidate the public finances over the medium term.

However, "running down sovereign assets to fund increased spending by contrast would be negative for the rating," says Fitch, which recently upgraded the country's sovereign ratings.

The banks will have to play a strong role in stimulating credit growth, but they are going through its own set of troubles.

The IMF estimates that non-performing loans is 30% of total loans, and remains cause for concern.

"Credit growth is constrained by limited lending opportunities against the backdrop of stricter prudential regulations. Moreover, credit is concentrated in selected small- and medium-sized banks, while large banks continue to deleverage."

Kazakhstan's BTA's second proposed debt restructuring of USD11.2-billion has been agreed by the creditors.

"The restructuring will need to be complemented by a viable business plan, including measures to strengthen the bank's risk management and to minimize contingent liabilities to the state."

Fitch Ratings believes the banks are still in the process of recognising and realising their loan problems.

"However, the banks have created provisions equivalent to 32% of total loans, added to a capital adequacy of 17.7% of risk-weighted assets, offering some loss absorption capacity."

While the financial service sector works through its problems, other areas also need to be looked at.

Heritage Foundation identifies corruption, while courts are "inefficient and susceptible to political interference by a powerful presidency."

There is clearly much that needs to be done.

The World Bank's 'Country Partnership Strategy' for Kazakhstan which was published last year notes the country has succeeded in many areas due to "legislative changes--easing business entry and exit conditions, payment of taxes and protection of investors' rights through strengthened corporate disclosure requirements."

However, dismantling of formidable hurdles, such as construction permits, access to financing, cross-border procedures, and licensing and permits needs to be expedited, the bank noted.

© alifarabia.com 2013

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