Ratings agencies such as Moody's and Standard & Poor's have been monitoring Central Asian markets. Photo: iStock

Low-rated Tajikistan, assigned a “B3” by Moody’s on corruption and governance weaknesses under strongman President Emomali Rahmon, easily sold out a debut US$500 million Eurobond as the original indicative yield dropped 1% to 7%, with the proceeds pledged to relieve chronic power shortages through construction of the world’s tallest dam.

Asian fund managers hesitated in contrast with those in the US and UK, as the juicy 10-year return was equal to long-standing sovereign borrowers Egypt and Lebanon in another tough geopolitical neighborhood.

Remittances from Russia and cotton exports have been the economic mainstays of reported 7% growth in Tajikistan’s gross domestic product, and the bond issuance raised the debt-to-output ratio above 50% amid the hangover of an unresolved banking crisis. The sector has been “in collapse” since the 2015-16 regional migrant-worker squeeze and currency devaluation, according to the Economist Intelligence Unit, as Rahmon further cracked down at that time on political opposition by banning the Islamic Renaissance Party and amended the constitution to extend his control.

The Tajik leader subsequently began to court Chinese and US business and diplomatic partners to diversify the country’s ties to Russia and Central Asia, especially after falling out with Uzbekistan’s former ruler over dam projects. He rejected conditions attached to a World Bank hydropower loan at a concessional 1.5% interest rate as too intrusive, but now seeks a $500 million agreement with the International Monetary Fund for banking-system support, under which rough fiscal balance will be maintained.

The government has invited in a resident IMF adviser to monitor long-recommended macroeconomic and competitive reforms, where  Tajikistan lags behind neighbors also recently embraced by investors despite a rocky track record.

Meanwhile in Kazakhstan, shares were up 34% through September on the MSCI Frontier Index as the country held its much-hyped Expo 2017 designed to highlight energy, tourism and financial services potential. President Nursultan Nazarbayev allegedly spent $3 billion on the spectacle in Astana, with a chunk taken from private pension funds absorbed into the state system, to lure global investors and journalists.

A new international stock exchange in Kazakhstan, one-quarter owned by its Shanghai counterpart and built in partnership with the US NASDAQ, is to overtake the languishing current one and host a wave of partial stake enterprise privatizations starting with the national airline, followed by oil and gas producers. The Central Asian country jumped 15 spots to No 35 on the World Bank’s “Doing Business” list over the past year with rule facilitation and automation.

It is a charter member of Russia’s Eurasian Economic Union but as well a main target for China’s One Belt One Road infrastructure program. Nazarbayev has also cultivated close Middle East ties, including through promotion of Islamic finance.

GDP growth was almost 4.5% through August, according to the Economy Ministry, double the original IMF forecast, with the non-extractive sector leading the way.

Standard and Poor’s lifted Kazakhstan’s sovereign ratings outlook to “stable” in July, pointing to inflation falling to the 6-8% goal and declining bank-deposit dollarization, down 20% to half the total. It praised tax-code changes, which should increase revenue by 3% of output, and “contained” balance-of-payments pressure with rebound in hydrocarbon foreign direct investment.

However, Kazakh banks are still dealing with double-digit bad-loan portfolios with scant breathing room from government-directed mergers and a recent 25-basis-point interest-rate cut to 10.25%, which has punished the currency, now near 350 tenge per US dollar compared with the initial 180-per- dollar flotation level.

Mongolia: low confidence

Mongolia’s dollar-denominated external debt had been Asia’s top performer with an almost 20% gain after the $5.5 billion IMF-led rescue package was announced, but slipped after Prime Minister Jargaltulga Erdenebat and his cabinet from the majority People’s Party were ousted in a parliamentary no-confidence vote for corruption and incompetence.

Since independence, no prime minister has completed a full term, and scandals played into the hands of the recent presidential election victory of populist Khaltmaagiin Battulga from the opposition Democratic Party.

The bailout is on hold until a fresh team is in place in Mongolia, as the Asian Development Bank predicted higher-than-expected 4% growth mainly due to coal exports, as the fiscal deficit narrowed to 6% of GDP in the first half.

Coal-company listings such as Tavantalgoi have propelled a 45% rise in the stock-exchange index this year, although capitalization at only $800 million has shrunk the past five years with currency woes, reflecting the area’s mixed-fortune post-Tajik-dam funding, with investor confidence still far from overflowing.

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.