Is Kazakhstan a safer bet than Russia?


Matthew Turner
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Kazakhstan is set to remain the safest country in central Asia, and as the economy diversifies away from hydrocarbon and mineral reserves, it could soon precede Russia in the Euromoney Country Risk rankings.

Economic diversification, banking sector reform and rising FDI inflows have tracked Kazakhstan’s rise to prominence in the Euromoney Country Risk (ECR) global rankings during the past year.

Kazakhstan was one of the best performers in the survey in the second quarter, after climbing four places.
With a global rank of 75, the sovereign remains central Asia’s safest-investment destination and could soon outflank Russia in the global risk rankings if conditions persist.

Indeed, Kazakhstan is considered more politically stable and structurally advanced than Russia, while both countries share similar economic fundamentals, according to contributing economists (see graph below).

As for the credit rating agencies, Kazakhstan is rated one notch above Russia by Fitch and S&P, and one notch lower by Moody’s.

Lilit Gevorgyan, senior economist at IHS Global Insight and one of ECR’s contributing economists, attributes Russia and Kazakhstan’s risk convergence to fiscal policy.

“Compared to Kazakhstan, Russia’s public spending bill is higher,” she says. “The social spending commitments president Putin made before being elected in 2012 has added additional pressure on the fiscal side, whereas Kazakhstan has relatively more room for fiscal manoeuvre.”

The Kazakh economy also appears set to benefit from the government’s 2012 business road map, which aims to diversify the economy away from hydrocarbons into information technology, pharmaceuticals and engineering.

Such a transition should help boost government investment, attract FDI inflows and keep the country’s growth engine ticking over. The Kazakh economy is expected to grow 5.5% in 2013, up from 5% in 2012.

“The Kazakh authorities have been mulling over economic diversification for some time now,” says Gevorgyan. “They realize that to fully utilize the country’s natural resources, they will need to invest in hard infrastructure, transport and high-tech industries, along with capitalizing on non-hydrocarbon-based energy supplies.”

A closer examination of Kazakhstan’s risk profile shows that banking sector restructuring, a highly skilled labour force and dynamic social institutions are also at play in helping to propel the sovereign into investment-grade territory.

Efforts to restructure the combined debt of the country’s banking sector, totalling $20 billion, also appear to have gone down well with country risk experts. The country’s bank stability score increased by 0.1 points to 4.1 (out of 10) in the second quarter of this year.

Kazakhstan’s president Nursultan Nazarbayev is looking to sell three of the country’s state-owned banks – BTA, Alliance and Temirbank – after they were nationalized during the 2008 and 2009 financial crisis.

“Banks’ market shares are on the move, new owners are taking over [and] the regulatory environment is being modified,” says a research note by ATF Bank.

This article was originally published by Euromoney Country Risk. Visit their website for a free trial.