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Black gold (oil) is the devil's excrement to some.
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IN THE 1970s, Venezuelan oil minister Juan Pablo Pérez Alfonso put the dubious advantages of large oil reserves in colourful terms. The mineral was, he said, "the devil's excrement". Kazakhstan, which has bigger reserves than Kuwait and ambitions to be the world's fifth-largest oil exporter by 2025, is up to its neck in the stuff.
Black gold, of course, is the cliché more commonly applied to the highly prized commodity which, if properly exploited, can transform the economic and social fortunes of a country.
The challenge facing Kazakhstan, which is ranked number six globally in terms of mineralization, is how to avoid the fate of the less-favoured oil producers. In Iraq, Nigeria and Venezuela, for example, a toxic combination of political strife and widespread corruption has meant that the general population faces falling rather than rising standards of living.
Xavier Sala-i-Martin, professor of economics at Columbia University, noted in a recent report: "Based on evidence from a cross-section of countries, natural resources such as oil and minerals do seem to be a curse rather than a blessing, as they impose a heavy drag on long-run economic growth. But the real curse of possessing oil is not so much that it incites the infamous Dutch Disease - the misallocation of resources away from tradable sectors - or that it generates uncertainty because of oil's price volatility.
"Rather the main problem with oil booms is that they give rise to a series of pathologies - rent seeking, patronage, corruption, plunder - that corrode vital domestic institutions and undermine domestic public institutions and undermine governance."
The authorities in Kazakhstan insist that they are well aware of the pitfalls. "If we don't diversify our economy away from oil and gas in 15 years or so we will face serious problems," says Grigori Marchenko, who as well as being governor of the National Bank of Kazakhstan (and Euromoney's central bank governor of the year 2003) is special economic adviser to president Nursultan Nazarbayev.
Less-known face of economy
Marchenko says that the central Asian republic's economic fortunes are not solely based on oil and gas and that this is not well understood outside Kazakhstan. "Oil and gas is seen as a sexy sector by journalists and so inevitably it attracts a lot of attention from the international media, which overshadows developments in the rest of the economy," he says.
According to Marchenko, recent statistics indicate that oil and gas have generated 18% of GDP, 30% of budget revenues and an average of 45% of foreign direct investment over the past five years. In his judgement that means energy's contribution is important, but not overly so.
Yerzhan Tatishev, chairman of Bank TuranAlem, agrees that the role of oil and gas in the Kazakh economy is often exaggerated outside the country. "The degree of economic dependency on oil and gas is far less than for other countries such as Russia and Venezuela, for example," he says. "Everybody understands that it is necessary for us to diversify our economy, but it will take time before we will see the results of our efforts. Kazakhstan is not limited to oil and gas development, but oil and gas is a major economic driver and so it would be stupid not to take advantage of that fact."
Economic performance since 2000 has been impressive. GDP growth has averaged more than 10%, inflation has been trimmed to less than 6% from over 13%, and the government's fiscal balance as a percentage of GDP has gone from a 1% deficit in 2000 to a bare surplus of 0.003% last year.
Reza Ghaffari, head of Citibank Kazakhstan, says that the government, having managed the transition from a centrally planned to a market economy well, now needs to think hard about the formulation of economic policy to ensure that the benefits of oil and gas wealth are not wasted and are evenly distributed.
"Everybody agrees on the need for economic diversification, but nobody agrees on how best to do it," he says. "I don't believe that the non-oil and gas sectors of the economy can grow on the basis of local demand. It has to grow on the back of export demand. Hence the government needs to develop policies which help to promote exports while at the same time encouraging accommodating foreign direct investment into the country."
Nurlan Talkenov, chairman of investment banking boutique Bridge Fund, agrees that creating the right environment for domestic and foreign direct investment will be vital if the country is to attain its economic potential. "In the past 10 years Kazakhstan has attracted around $20 billion of investment, but wants to attract $60 billion in the next 10 years. It can't generate all of that amount domestically and so it needs to be attractive to investment from abroad as well."
The good news from the capital and bank markets is that the appetite for Kazakh risk is extremely strong at the moment.
Bank TuranAlem, for example, recently secured a $245 million dual-tranche term loan via mandated lead arrangers Citigroup and Deutsche Bank - the largest ever syndicated loan for a Kazakh bank, indeed for any privately owned bank from the Commonwealth of Independent States. "There's a very positive story surrounding Kazakh banks over the last 12 months," says Ben Dobson, vice-president in the global trade finance department at Deutsche Bank in London.
He adds that as a result of Kazakhstan's positive credit story - last year Moody's Investors Service raised the country to its investment grade Baa3 level which had a big effect on the number of banks able and willing to lend - the leading Kazakh banks have been able to raise larger amounts over longer maturities at tighter pricing.
On the back of commitments from 49 banks from the Americas, Asia, Europe and the Middle East - a new record for a Kazakh bank syndication - BTA was able to price the $134.75 million 12-month element of the transaction at a tight margin of 215 basis points over Libor, while the $110.25 million 18-month portion was the first time a Kazakh bank had been able to secure such a tenor in the international syndicated loan markets. Dobson says that the use of the proceeds - the export of commodities and the import of capital equipment - is easily understandable and "is genuine banking business with which lenders are comfortable".