新 興 国 マ ク ロ 経 済 WAT C H

Kazakhstan
Aiming for the top 30
Alain Borghijs

Senior Economist, Country Credit Department
Japan Bank for International Cooperation

On the crossroads of Europe and Asia lies
Kazakhstan, a vast nation spanning the twocontinents. Sharing borders with Russia in thenorth, China in the east, and Turkmenistan,
Uzbekistan and Kyrgyzstan in the south,
Kazakhstan is the world’s largest landlocked
country with an area of 2.7 million square
kilometers, or about 7 times the size of Japan(Figure 1). Yet, it is only inhabited by 18 million
people, ranking it among the most scarcely
populated countries. Its sheer size struck me as I
flew from Almaty to Astana on a recent businesstrip to Kazakhstan in November 2016. During the
90 minute plane ride, I was able to spot only a few
settlements in the vast snow-covered Kazakh
steppe.
Figure 1: Kazakhstan and its neighbors

Source: Google Maps

Kazakhstan is not only a giant in terms of landsize; it also dwarfs its neighboring countries in theCentral Asia region in economic size, accounting
for about 60% of the region’s GDP. The otherCentral Asian countries (Kyrgyzstan, Tajikistan,
Turkmenistan and Uzbekistan) jointly make up theremaining 40%. Kazakhstan’s per capita income,30

2017.3$11,390 in 2015, is the highest among the Central
Asian countries.
The country has also set big ambitions for its
future development. In 2015, its long-time
President Nursultan Nazarbayev announced thetarget for Kazakhstan to join the top 30 mostdeveloped countries in the world by the year 2050.

Economic transformation
During the Soviet era, Kazakhstan played an
important industrial and agricultural role. Since
then, it has also been home to Baikonur, the base of
the Soviet and Russian space program.
After the dissolution of the Soviet Union andKazakhstan’s independence in 1991, the economy
underwent substantial structural changes as thecountry transitioned from a planned to a market
economy. Between 1992 and 2015, the share of
agriculture in the economy declined from 27% to
5%. Over the same period, services grew from 29%
to 63%, while the share of industry shrank from
45% to 33%.
The country initially went through an
adjustment period; the economy contracted byalmost 40% over the first five years following its
independence. Since then, the Kazakh economy
has grown robustly at an average rate of 6% peryear for the past two decades. As a result, thecountry progressed from lower-middle income
status to upper-middle income status while percapita income grew 2.6 times in real terms between
1996 and 2015.

A well-oiled economy
A key driver underlying Kazakhstan’s rapid
economic expansion has been the oil and gas

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Figure 2: Kazakhstan oil production

Source: Energy Information Administration（EIA）

Figure 3: GDP growth and oil priceSources: World Development Indicators and Global Economic Prospects (GDP)and Thomson Reuters and EIA (oil price)
Note: * indicates forecast

Figure 4: Kazakhstan’s export composition in 2014

Source: http://atlas.media.mit.edu/en/

industry. Kazakhstan’s oil production almost
quadrupled from less than 500,000 barrels
per day in 1992 to 1.8 million barrels per day
in 2015. Its share in global oil production
increased correspondingly from 0.7% to1.8% over the same period (Figure 2). In
2015, it was ranked the 18th largest oil
producer.
Oil production is set to increase further.
In 2000, the largest oil reserve found in
decades was discovered in the Caspian sea
off the coast of Kazakhstan. Its location of
4,200 meters below the seabed and othergeographic challenges made it one of themost technically and logistically challenging
projects to develop. The Kashagan oil field –named after the Kazakh poet Kashagan
Kurzhimanuly – started production at the endof 2016. As oil production in the field
gradually picks up, Kazakhstan is set toeventually produce more than 2 million
barrels a day.
Given its reliance on oil, periods ofincreasing oil prices have translated into
strong economic growth performance, while
oil price drops resulted in growth slowdowns.
The latter occurred in 1998, 2008-2009, andmost recently in the wake of the oil pricecrash in 2014, which I will discuss in moredetail below (Figure 3).
The oil sector accounts for about 15% ofGDP. Oil and gas are by far the largest export
commodity for Kazakhstan, generating $47
billion in export revenue in 2014 (Figure 4).
With its roots both in Asia and Europe,
Kazakhstan has adopted a so-called“multivector” foreign policy. It aims tobalance relationships with the United States,
Russia and China as well as with countries in(Central) Asia and Europe. It is a member ofvarious regional organizations, including theCommonwealth of Independent States,
Eurasian Economic Union, Central Asia
Regional Economic Cooperation Program,and the Shanghai Cooperation Organization.
This multipronged approach is also reflected
in its trade relations; Kazakhstan’s key
trading partners include both Russia and2017.331

China as well as several European Union countries.
Kazakhstan is also strategically located tobenefit from China’s One Belt One Road plan,
which aims to improve land and sea transport
corridors connecting China, Central Asia, theMiddle East, and Europe. The plan may result in
substantial infrastructure investment to developtransport corridors in Kazakhstan.
Kazakhstan’s natural resources have been an
important source of tax revenues for the government.
Taxes from oil and gas production and exports haveallowed Kazakhstan to accumulate assets in asovereign wealth fund, the National Fund of the
Republic of Kazakhstan (NFRK). The NFRK wasestablished in 2000 with the dual objective of
stabilizing the economy in case of large fluctuationsin the oil and gas price, and generating savings for
future generations. At its peak in 2014, the NFRK
had accumulated $76 billion, equivalent to 36% of
GDP.
In addition to the NFRK, the government also
owns the Samryk-Kazyna fund. This fund manages
the state-owned enterprises and is valued at about$60 billion. Among the companies that the fundowns are the national rail and postal service, thestate oil and gas company KazMunayGas, and Air
Astana. At a meeting in Astana, Samryk-Kazyna
executives explained that the fund is a key player inthe government’s efforts to privatize state-owned
enterprises and diversify the economy.

Recent economic developments
The country underwent a substantial economic
growth slowdown, resulting from the collapse in
the oil price since mid-2014. This was compoundedby the growth slowdown in two key trading partnersof Kazakhstan; China and Russia. In China, growth
had started decelerating gradually since 2011 fromits earlier double digit levels as a result of theeconomic rebalancing from an investment andexport-led growth model to a domestic
consumption-driven model. This resulted in a sharp
decline in the need for energy and raw materials,
the two key export products of Kazakhstan to
China. Shortly after, growth in Russia slowed down
considerably resulting from the combined effect of32

2017.3the oil price decrease and economic sanctions.
Exports from Kazakhstan to China and Russia
declined by more than 30% between 2011 and2014 from a combined value of $24.1 billion to$16.6 billion.
As a result of these simultaneous external
shocks, growth in Kazakhstan decelerated from
6.0% in 2013 to 4.2% in 2014, before plunging to
1.2% in 2015 (Figure 3). The economy wasestimated to be stagnant in 2016. The drop in export
revenue resulted in a negative current accountbalance in 2015, the first time since 2009.

Countering the downturn
The government’s response to mitigate the negative
impact of the external shocks was twofold.
To counter the impact of the drop in private
demand, the government introduced a fiscal
stimulus package to support small and medium
sized enterprises, develop infrastructure, andsupport the banking sector. To finance the budgetary
shortfall, the government withdrew resources fromthe NFRK, consistent with its mandate to stabilize
the economy. It also borrowed $2 billion incountercyclical support from the AsianDevelopment Bank and the World Bank. It isestimated that the fiscal deficit excluding transfersfrom the NFRK widened to about 10% in 2015.
Recognizing that the oil price may not reboundrapidly, and wanting to protect the NFRK fromrapid depletion, the government intends to pursue
gradual fiscal consolidation over the next few
years.
Monetary policy changes were even more
drastic. In response to devaluation pressure on the
Kazakhstani tenge, the central bank decided in
mid-2015 to abandon pegging the tenge to a basket
of foreign currencies, and introduced a floatingexchange rate and an inflation-targeting monetary
policy. This resulted in a depreciation of the tenge
against the US dollar from 185 tenge in 2015 to
390 at its lowest point in early 2016. Since then thetenge has gradually recovered to about 330 tenge
per US dollar. Interestingly, in floating the exchange
rate, the tenge broadly followed the course of theRussian ruble against the US dollar (Figure 5).

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Figure 5: Exchange rate movement in Russia andKazakhstan (2 January 2013 = 100)

Source: IMF

The depreciation of the tenge in turn resulted
in a sharp increase in the price of imported goods
and the inflation rate, despite overall weaker
demand. Inflation increased from 3.8%, year-onyear, in August 2015 to 16.7% in May 2016. As aresult of the subsequent stabilization of theexchange rate, inflation pass-through had largely
been completed by the end of 2016, and inflation
had subsided within the target band set by thecentral bank. The depreciation of the tenge also
helped in improving the fiscal balance of thegovernment, by increasing the tenge value of the
US dollar denominated receipts from the oil andgas sector.
While the situation was challenging, thegovernment’s efforts to stabilize the economy andreduce the impact of the drop in growth werelargely successful. This is by no means a small
accomplishment. Changing the exchange rate
regime is a challenging task for any country evenunder normal circumstances let alone under thepressures of an economic downturn. The rocky
monetary transitions in a number of other resourcerich economies in recent years have demonstrated
the complexity of the task.
As a result of the successful stabilization
efforts, Kazakhstan’s growth is forecast to pick up
to 1.9% in 2017 and 3.7% in 2018 (Figure 3).
However, the speed of recovery will cruciallydepend on the evolution of the oil price, and fulleconomic recovery is expected to stretch over
several years.
The economic turmoil also impacted thebanking sector. The sector, which was heavily
affected by the 2008 financial crisis, has yet to
fully recover from that episode. The financial

sector continues to be exposed to a substantial
amount of non-performing loans. The depreciationof the tenge – which increased the repayment costof US dollar-denominated borrowing – isanticipated to exacerbate this problem.
Kazakhstan’s economic challenges did not go
unnoticed with the international credit rating
agencies. In quick succession they downgradedKazakhstan’s creditworthiness. However, despite
the severity of the crisis, downgrades were limited
to a modest one or two notches at most.
One of Kazakhstan’s economic strengths
quoted by the rating agencies is the very low levelsof government debt by any standard. Even after
expanding government borrowing to deal with theeconomic downturn, the debt level remained low at
22% of GDP in 2015.

Strategy 2050 – Preparing the
economy for the future
While the country appears to have successfully
weathered the economic downturn, it faces the far
more complex and daunting challenge in the longer
term of reducing its reliance on the oil and gas
industry. To achieve this goal, and its vision ofreaching the top 30 developed countries, thecountry must diversify and strengthen the economy.
The country’s leadership recognizes thischallenge, and has developed a number of strategies,
programs and reform measures, which I describe insome detail below. However, successful
implementation will be the key measure of success,and is by no means guaranteed. Especially in thecurrent unfavorable economic environment,
decisive action is needed more than ever to decouple
the economy from swings in commodity prices. At
the same time, the economic downturn makes
undertaking reform measures more challenging, as
it may inflict further hardship.
To address the challenge, Kazakhstan’s“Strategy 2050” was developed in 2012. Economic
diversification is a key pillar of the strategy. In
addition to a number of traditional industries,
diversification plans also focus on sectors withhigh domestic demand such as machine building,pharmaceuticals, construction, and building
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materials; export-oriented sectors such asagribusiness, light industry, and tourism, andinnovative sectors like information andcommunications technology, biotechnology, andalternative power engineering.
Complementing its long-term strategy, thegovernment announced in 2014 the “Nurly Zhol”(bright path) modernization program. The programis a $15 billion infrastructure investment program
to be implemented over the period 2015-2020. The
program aims to develop infrastructure for transportand logistics; industry and energy; modernize
public utilities infrastructure including water andheat supply networks; and provide support forsmall and medium-sized businesses. Infrastructuredevelopment is deemed essential to improveconnectivity in the landlocked country.
The need for increased infrastructure
investment in Asia, if the region wants to maintainits growth momentum, is echoed in a recent study
published by the Asian Development Bank entitled“Meeting Asia’s infrastructure needs”. The study
estimates that infrastructure investment needs inCentral Asia over the period 2016-2030 amount toalmost $500 billion or close to 7% of GDP. Central
Asian countries would have to considerably step up
investment to meet this target.
To finance its long-term development plans,
the country has been tapping various financing
sources. It works in close collaboration withvarious international organizations. For instance,
the Asian Development Bank, one of Kazakhstan’s
key development partners, has provided over $4.4
billion in loans since 1994, with a focus ondeveloping transport routes, fostering the private
sector, supporting social equality, and improving
energy security.

One hundred steps
A broader set of institutional reform measures waslaunched in 2015 under the slogan “One Hundred
Concrete Steps, a Modern State for All”. The
reform measures cover a wide range of areas,
including steps to professionalize public
administration,
strengthen
theregulatory
framework, improve public financial management
and accountability, and enhance the management34

2017.3of state-owned enterprises.
The government also intends to reduce its rolein the economy through privatization of stateowned enterprises. Currently state involvement in
the economy is widespread in various sectors. To
promote efficiency and private sector participation,
the government aims to gradually dispose of stateowned enterprises over the period 2016-2020. The
objective is to reduce the share of state participationin the economy to 15% of GDP. A priority list of
the 65 largest state-controlled companies has been
identified, including railways, the postal service,
Air Astana, and various airports.
To provide a more investment-friendly
climate, Kazakhstan has been taken steps toimprove the business environment. As a result, it
most recently substantially improved its ranking in
the annual Doing Business survey. It jumped from
51st place in 2016 to 35th place in 2017 out of 190
countries ranked. Reforms improved areas such as
starting a business, getting electricity, dealing withconstruction permits, protecting minority investors,
trading across borders and resolving insolvency.
On the annual Worldwide GovernanceIndicators, Kazakhstan was ranked in the fiftiethpercentile worldwide on regulatory quality andgovernment effectiveness. It ranked in the fortiethpercentile for rule of law and political stability,with lower scores for control of corruption andvoice and accountability.
On the political front, the country is also
readying itself for a potential change. President
Nursultan Nazarbayev, who is currently 76 years
old, has ruled Kazakhstan since 1990. In January
2017, he announced constitutional changes thatwould transfer some of his authority to the cabinet
and parliament. These changes, while decentralizing
the decision-making, are also said to be paving theway for the president’s eventual succession.
The country has also been active in raising its
international profile by organizing various
international events. In January 2017, it hosted the28th Winter Universiade in Almaty. Later this year,
Astana will host the Expo 2017. Astana also
prominently featured in the news recently as thevenue for Syrian peace talks.
Perhaps one of the most tangible ways inwhich Kazakhstan demonstrates its vision towards

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the future is the futuristic architectural design ofthe capital Astana. The new city, which became thecapital in 1997 after the seat of the government was
moved from Almaty, was built from the ground up
in the steppes of northern Kazakhstan. Its urban
masterplan was designed by Japanese architect
Kisho Kurokawa. Even when braving arctic
temperatures of minus 30 degrees Celsius–Astanais ranked as the second coldest capital in theworld–I could only marvel at the progressive
design of numerous buildings (Figure 6). On thearchitectural front, the country has certainly alreadyearned its spot in the top 30.

※著者略歴：Alain Borghijs is senior economist in theCountry Credit Department of the Japan Bank forInternational Cooperation. His assignment includes
conducting sovereign risk assessments in Central
Asian and Latin-American countries. Alain is seconded
from the Asian Development Bank (ADB), where heworked for 12 years, most recently in its Strategy and
Policy Department. He was in charge of the team thatcoordinated the negotiations for the last two
replenishments of the Asian Development Fund,
ADB’s largest fund for the poorest countries. Alain
holds a PhD in Applied Economics from the Universityof Antwerp, Belgium.


Figure 6: Baiterek Tower in Astana
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