Learning to Cope with Kazakhstan’s New Normal

The days of extremely high-level consumer demand from strong economic growth in Kazakhstan are over, and they are not expected to return in the near future. Executives have been caught by surprise to see the country, which enjoyed substantial rises in consumption for most of the past 15 years, struggling to maintain growth in 2015 with only a modest recovery projected through 2018.

This new normal solidifying in the country is forcing multinationals to adjust their business plans and lower expectations across sectors.

Highly dependent on oil and gas, with energy accounting for 30 percent of GDP and 50 percent of government revenue, Kazakhstan’s economy has suffered as a result of the significant drop in oil prices since late in 2014. The subsequent collapse of the Russian ruble, which has left the Kazakh tenge exports uncompetitive, as well as the fall in demand from primary trade partners (China, the Eurozone and Russia) have exacerbated matters. With commodity prices expected to remain low for the next several years, the Kazakh economy will struggle to recover strongly beyond 2015. We foresee growth averaging only 1.2 percent between 2015 and 2017 – a far cry from the 9 percent growth rates in the mid-2000s.

 

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In the shorter-term, the government must face the challenge posed by the collapse of both the oil price and the Russian ruble over the past six to nine months, which in turn has put considerable pressure on the tenge. With energy exports serving as the main provider of forex reserves, the sharp drop in oil prices has drastically reduced oil revenue and threatens the government’s strategy of propping up the overvalued tenge. Likewise, since January 2014, the Russian ruble has lost nearly 40 percent of its value against the dollar, causing Kazakh exports to become rapidly uncompetitive and to decrease as a result. In the short term, the government can use its currency reserves to support the tenge and fill budget gaps, but its ability to do this beyond 2016 – which they would likely need to – is quite limited. As a result, FSG anticipates a gradual, phased devaluation of the currency over the next year, with an initial 5 to 10 percent devaluation in the coming months, likely followed by another phase as necessary.

What Businesses Can Do

With consumer demand suffering from significantly slowing growth – a problem that tenge devaluation would exacerbate – multinational corporations focused on consumers need to rethink their targets, pricing strategy and product mix in the market. B2B companies should seek opportunities in the government’s major infrastructure spending program, which is being used to prop up the economy. In such an environment, firms should emphasize lower-cost products and ensure their distributors are prepared for this new climate of prolonged slow growth and lower consumer demand.

The slow growth environment multinationals are facing in Kazakhstan poses challenges for their strategy to compensate for weak performance in Russia by expanding in the CIS. Kazakhstan remains a less competitive market than Russia and will continue to offer opportunities for companies growing from a low base or just entering the market. However, multinationals should set realistic expectations for the pace of growth in the market and ensure that they are putting in the right resources to identify niche opportunities and consolidate market share, including setting up a local presence.

For a full, more comprehensive update on the Kazakh economy, FSG clients can access our latest Kazakhstan Market Spotlight and listen to our podcast. Not a client? Contact us at info@frontierstrategygroup.com.

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