The death of Uzbekistan’s post-independence strongman President Islam Karimov without a designated successor, a pattern neighboring counterparts may repeat, has combined with commodity, currency and banking crises to sideline Central Asia from the current global liquidity-driven yield chase into frontier financial markets.
The few stocks and bonds available in Kazakhstan, Azerbaijan, Mongolia and the rest of the region have suffered their own political and economic drift and trade and investment hangovers from next door major partners China and Russia.
After dismissing criticism of poor governance and business climates, they began haltingly to embrace reforms that now may move into higher gear with approaches to international development lenders for energy and mining project and fiscal and external payments assistance.
However, the risks of autocratic family dynasties and large exchange rate, transaction rule, and credit access swings will linger, as growth and structural gaps with surrounding Central European and East Asian economies become more pronounced.
Kazakhstan stocks on the MSCI frontier index were flat through August on barely positive GDP growth in the first half, with only agriculture a good performer, up 2.5%. President Nazarbaev reshuffled his cabinet the first week in September, naming a former business executive and economics professor as prime minister, to underscore commitment to escaping recession after dual oil price and currency crashes.
He moved Karim Massimov, frequently mentioned as a successor along with his daughter who is a deputy prime minister, to head of the security service, which was called on to quash street protests last year.
Since 2015’s tenge devaluation and 50% loss against the dollar, inflation has skyrocketed to near 20%. The central bank kept the benchmark interest rate at 13% at its last meeting, and forecasts single digit inflation into 2017 as banks and households absorb the exchange rate blow. Recently, Halyk Bank, the number two lender and a main stock market listing, raised its profit expectation as retail and corporate clients steadily “de-dollarize.”
Foreign direct investment plunged 30% last year, but recovered in the first quarter to $2.7 billion diversifying from commodities into chemical and auto manufacturing, according to government statistics. A global push targeting the US, Europe and the Middle East is underway, but the Foreign Minister Erlan Abilfayizuly Idrissov recently urged a more project-tailored approach, and criticized the lack of “clear import and export policies.”
The Asian Development Bank approved a $250 million loan for transport system modernization that will aid preparations for next year’s World Expo in Astana, with an estimated $3 billion price tag. By then, the sovereign wealth fund also intends to unload 25% stakes in big state-owned firms including the airline, electricity, oil and gas, and uranium companies. By end decade, 65 offerings are to take place, out of over 200 enterprises with $65 billion in assets in Samruk-Kazyna’s portfolio.
However, the timetable has slipped with recent hydrocarbon export rebound, and international investors remain wary of bad corporate governance after independent directors at London Stock Exchange-listed KazmunayGas, among the first on the block, protested a minority shareholder buyout attempt.
External bond buyers are also cautious after $4 billion in sovereign issuance a year ago, as the investment-grade credit rating has since slipped to the lowest ranking in the category, and the government debt strategy now stresses domestic state pension fund placement.
Azerbaijan, the area’s other energy giant, has already been downgraded to junk “BB” status with a negative outlook, amid rumors of another currency devaluation and capital controls after banks suspended dollar sales with a chronic shortage after the previous 50% adjustment.
President Aliev ordered the $35 billion sovereign wealth vehicle Sofaz to increase supply to preserve calm before an end-September constitutional referendum which would extend his term from five to seven years. He has released jailed political opponents and journalists in a bid to win $8 billion in support from international development lenders to complete a direct Caspian Sea to Europe pipeline.
The economy will shrink 3% this year, according to the IMF, and bad loans are in double digits after one bank rescue in the immediate manat depreciation aftermath, as both Central Asian leaders try to salvage once semi-prosperous, family-controlled legacies.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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