Shaky structure maintains a growth rush

TURNING IN THE second best performance of the 12 Commonwealth of Independent states (CIS) countries in 2002, Kazakhstan’s economy is still unbalanced. Although oil and minerals production is still the engine of growth and earns the republic good money, dependence on raw materials is an Achilles heel. The economy may be lopsided but it grew by 9.2% over the first half of 2002. Industrial output increased by 8.7%, agricultural production rose 5.1%, and construction, transport and communications all grew by well over 9%.

Even more encouraging is the improving standing of services and consumer-driven industry: the mineral and raw material sector still accounts for 80% of GDP in terms of output but broken down by expenditure, services already account for more than half of GDP. That is on a par with developed countries and its share is increasing every year. Industry accounts for a little under a third of GDP.

The republic’s dependence on world commodity markets made itself felt in the second half of 2002 when falling oil prices knocked $300 million off tax receipts, despite oil production rising by 13%. Economic growth was expected to end the year a more modest 7.5% up.

The pain was felt most in industry, where production growth fell to 5.9% over the first half of the year, about half the government’s forecast, and fixed investment also fell. At the same time inflation began to rise and was expected to reach a still manageable 7.4% at the end of 2002.

Still, Kazakhstan’s 2002 growth is only just behind CIS leader Azerbaijan’s 8.5% and well ahead of the 4.5% CIS average that was expected for the year.

Growth is likely to be sustained by the almost completely reformed banking sector. Banks have increased the volume of loans fourfold in the past three years.

“I believe that’s a world record, and probably loans just can’t grow faster,” says the reformist governor of the National Bank of Kazakhstan, Grigory Marchenko.

The financial reforms are largely complete and the sector is a healthy mix of three large universal banks and a second tier of about 30 banks filling out the niches. The country’s pension funds have collected $1.4 billion and are adding about $30 million every month.

In December Halyk Bank, the Soviet-era savings bank and the republic’s second largest, announced that profits had doubled between January and November while its capital was up two-thirds to $120 million as of December 1 2002.

Marchenko is aiming to bring regulation up to rigid EU financial standards by 2007. “Of course, this is a daunting task,” he says, “but it would not entail very serious changes for local banks, pension funds or asset management companies.”

The problem for Kazakh banks now is that they have more money than there are companies to lend it to. NBK says that 38 local banks granted loans worth $1 billion in August alone but fast-growing private and corporate deposits are pushing them to find even more borrowers.

As the state doesn’t need to borrow, there are few bonds to buy, and the stock market remains the laggard of financial reforms with few companies willing to list significant chunks of their stock. The banks’ growing liquidity could cause problems.

In an effort to provide a safety valve and to soak up some of the excess liquidity, Marchenko is – somewhat impatiently – encouraging domestic banks to expand abroad and specifically to set up shop in Russia.

“Everyone must have clean forgotten that two years ago the president said banks should reach out for markets in nearby states, given the excessive liquidity of the Kazakh financial system,” Marchenko says. “In the Urals, in Siberia or in the Volga region our banks could become big players.”

Kazkommertsbank, Kazakhstan’s largest bank, has already bought a neighbouring Kyrgyz bank and has started operations in Moscow. The second-largest bank, TuranAlem, also has a stake in a Moscow bank.

Toksan Adekenov, the chairman of Moskommertsbank – Kazkommertsbank’s venture in Russia – sits in an almost bare office in a posh business centre just off Tverskaya, Moscow’s main thoroughfare. A few papers and a laptop are the only things on his desk but his mobile phone constantly receives calls from Almaty, Kazakhstan’s commercial capital.

Starting with financing trade between the two countries – already a $5 billion a year business and expected to double again in a few years – MKB aspires to become a player on the Russian market too. “Things are moving very fast here and banking reforms that happened in Kazakhstan five years ago are just taking off,” says Adekenov. “We believe in a few years that the number of Russian banks will be cut from the current 1,300 to between 400 and 500. MKB intends to be one of Russia’s top 100 banks.”

Within two years MKB hopes to start lending to the best of Russia’s medium-size companies – those with turnover of between $20 million and $100 million a year. It also intends to become an investor in the Russian securities and bond markets, through another subsidiary, East Capital.

In its first two months of operation MKB has already extended $30 million worth of trade credits to Russian companies doing business in Kazakhstan and hopes to increase this to $100 million by the end of 2003.

Diversification It would be better, though, if the banks could find more to do at home. Kazakhstan is now moving into a second phase of its recovery and the emphasis is turning to diversification, hampered by overbearing bureaucracy and corruption.

“We would like to build up manufacturing industry, which is developing faster than any other sector of the economy,” says Zhaksybek Kulekeyev, the former economy minister. “Last year production in the chemical industry rose by 55%; leather processing and footwear manufacturing by more than 300 %. And within the last two years we doubled the volume of production of machine-building.”

Agriculture is the second most important segment of the economy and here too things are going well. Kazakhstan, Russia and Ukraine all had bumper grain crops in 2002 and are flooding their export markets. Kazakhstan was expecting to harvest 15 million tonnes of grain by the end of 2002, only slightly down from 15.9 million tonnes the year before.

Analysts say export prospects for all three states are better than ever, as lower crops expected from Argentina, the US, Canada and Australia are likely to boost world demand.

And rising income is feeding other business as per capita GDP tops $1,500 a year. As a sign of the increasing power of consumer spending at the end of last year, Russian automotive company GAZ, the maker of the Volga saloon, set up a car assembly plant in Kazakhstan that is expected to go into production this month.

Shops and restaurants are filling up the leafy streets of Almaty but until government pushes through extensive structural reforms the republic will remain hostage to external shocks and the price of oil and metals.