Image: Flickr
Image: Flickr

Central Asia investors rode brief  “One Belt, One Road” summit momentum, as the traditional Silk Road is a major target of China’s initial US$100-billion infrastructure spending spree. But the economic and financial market picture was blurry following headline stock and bond performance and the IMF’s May outlook update.

Through April Kazakhstan was a leading Morgan Stanley Capital International frontier equity market – up 25%, while at the other extreme International Bank of Azerbaijan external bonds defaulted as the lender filed for bankruptcy in New York and knocked sovereign prices in turn. The Fund report predicted medium-term growth progress toward 4.5%, but pointed out the rate was 8% from 2000-14. Oil exporters will see a slight rebound to 3% this year, as output increases from Kazakhstan’s Kashagan field, while Azerbaijan’s remains constrained by the OPEC-plus supply accord and Turkmenistan will run a small balance of payments deficit. Oil importers like the Kyrgyz Republic and Tajikistan will depend on the recovery of other commodity prices and remittance earnings for growth around the same level, but a lack of diversification and banking system and political drags across both country groups continue to pose “downside risk,” according to analysts.

Kazakh President Nursultan Nazarbaev has introduced constitutional changes to modernize the state by sharing more power with the courts and legislature

Non-oil fiscal deficits in Azerbaijan and Kazakhstan will reach 20% of GDP this year, with a sovereign wealth fund (SWF) transfer to repay debt in the former and a big banking sector rescue in the latter. Following local currency depreciation, public debt costs have jumped throughout the region, with their highly dollarized financial structures from the post-independence era. The Fund advises domestic instrument securities market expansion and better accounting of state enterprise borrowing as government contingent liabilities to reduce burdens.

Current account gaps have halved, but are still pronounced at over 3% of GDP, while Central Asian oil importers’ shortfall will be triple that ratio due a combination of higher import prices and weak currencies. Inflation was in double digits for the first time in a decade last year in Azerbaijan and Kazakhstan with combined devaluation and terms of trade shocks.  Baku also raised controlled utility and food prices, but future fallout should be cushioned with January’s floating exchange rate shift to enable single-digit inflation, the IMF believes. Tenge stabilization likewise has prompted Kazakhstan’s central bank to reduce policy rates in recent months as it adopts formal inflation-targeting.

Regional credit is “depressed” and contracted 5% in 2016 as overdue and restructured loans spiked at undercapitalized banks. Repair is “urgent” and governance, ownership, supervisory and transparency problems are “deep rooted,” the Fund warns. Azerbaijan closed smaller institutions and injected money into International Bank in a failed bid to stem default; Kazakhstan is merging dominant players Halyk and KKB; and Tajikistan is closing and recapitalizing several institutions despite lax regulation impeding cleanup. The May outlook urges officials to treat vulnerabilities as systemic and not to become complacent as commodity prices and trade, capital and remittance flows rebound with Russia, China and other economic partners. It adds that ambitious structural reform initiatives like Kazakhstan’s “100 Concrete Steps,” which would cut administration and strengthen legal and business protection, imply less government interference and greater implementation capacity than in the post-crisis record to date.

Kazakh President Nursultan Nazarbaev has introduced constitutional changes to modernize the state by sharing more power with the courts and legislature after winding down the “Nurly Zhol” housing, infrastructure and small firm budget stimulus. The non-oil deficit goal is 7% of GDP by end-decade. Foreign direct investment, chiefly in hydrocarbons, quintupled last year to $15 billion, and normal foreign reserves cover nine months’ imports. However, gross external debt, almost half of commodities-related intercompany lending, is steep at 120% of GDP and an unrecognized contingent claim. Underperforming loans are 40% of the total, and after getting a $1 billion bailout in December KKB is due to be acquired by state-owned retail giant Halyk, which will give the new entity 40% of the market. Eventual privatization through a partial stock exchange sale is promised, but for now selected “blue chips,” including the national airline and phone company, are to go on the block in the coming months after continued delays and the index rally will only last with such “concrete” landmark transactions.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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