Is Kazakhstan becoming an appealing market again?

After a severe slowdown in growth and much volatility since early 2015, Kazakhstan is now entering a new normal. For multinational corporations, the rapid downturn came as a major surprise and most firms are wondering when the country will return to stronger levels of growth. Although 2017 will see only mild improvements, over the medium-term Kazakhstan will prove to be the strongest growing market and most attractive opportunity after Russia, within your firm’s CIS portfolio.

The tenge depreciated by roughly 100% in late 2015, and has stabilized around its real value to the USD around 335 since early 2016. The fall of the tenge had driven inflation up substantially – to average about 14% YOY in 2016 – causing real incomes to fall by around 6% in 2016 and consumer demand to contract. Business demand has slowed as well and overall economic sentiment remains weak. The economy stagnated in the first half of 2016 and will fail to recover in the 2nd half of the year.

Fortunately, the worst of Kazakhstan’s economic crisis appears to be over. Unlike in neighboring Azerbaijan and Russia, whose economies will contract by 3% and 1% YOY this year, respectively, Kazakhstan will avoid a sharp recession this year. Public investment spending has grown by around 4% YOY in H1 2016, thanks to strong reserves accrued during the oil boom years, propping up the economy throughout the year. Additional Chinese investment via its One Belt, One Road initiative has given investment growth an additional boost. Strong investment between 2015-2017 will be critical to the growth of business demand in the coming years.

Russia economic crisis

Perhaps most importantly, stability and predictability have returned to the market after such high levels of volatility, allowing companies to plan and set targets for 2017 and the medium-term with more confidence. The oil price and the tenge have stabilized, which in turn has begun to moderate inflation. Price growth therefore will slow notably in 2017 (averaging about 7% YOY, down from 14% YOY in 2016). Politically, President Nazarbayev enjoys very strong support and maintains tight control of his government and the country. Protests and violence have increased over the past year, and will continue in the coming year, but will not to pose any significant political threat or serve to destabilize the economic environment.

Tenge volatility in Russia

Kazakhstan’s outlook beyond 2017 is quite strong thanks to rising energy output. Production at the long-awaited oil and gas field Kashagan has begun, and is expected to increase substantially in 2017. In 2018, further production increases in Kashagan will be accompanied by higher output from the large Tengiz oil field. Meanwhile, energy prices will rise minimally each year for the rest of this decade just as Kazakhstan starts pumping more. For this reason, the economy will grow minimally in 2017 (by 1.5%) but accelerate in the years after, rising by 3% YOY in the 2018-2020 period.

Nonetheless, MNCs have naturally adopted a wait-and-see approach to Kazakhstan amid the slowing growth and volatility preventing them from deepening their investment. However, firms with a more strategic vision for the market should look for opportunities now, to get ahead of the competition and capitalize on the market’s recovery in the coming years.

More tactically, in 2017 firms should continue to find efficiencies in their channel, re-segment their customer base after such major shifts in demand over the past two years, and focus on demonstrating the value of their product to price-sensitive consumers and businesses. Growth will be slow and a more apparent recovery will arise only in 2018.

FSG clients can access our Kazakhstan Market Spotlight for a deeper analysis of the country’s outlook for 2017.


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