Kazakhstan

A lack of economic diversification makes Kazakhstan’s economy highly vulnerable to global demand for and prices of commodities. The country has an abundance of raw materials, in particular hydrocarbons. Commodities account for more than 80% of exports. Kazakhstan is also exposed to the business cycles of Russia and China, its main trading partners. Moreover, a high dependence on a few large-scale production sites poses risks, as reflected in the shutdown of the offshore Kashagan oilfield in October 2013 due to damage to the pipeline infrastructure, which had weighed on the economy for several years.

Kazakhstan’s recovery from the double shock of the global Covid-19 crisis and the drop in oil prices in 2020 has been robust. After contracting by -2.6% in 2020, real GDP expanded by +4.1% in 2021 and +3.2% in 2022. The external sector was the main growth driver, benefiting from surging global oil and gas prices and, in 2021, rapid growth in China (Kazakhstan’s main export destination). The impact of the latter faded in 2022 owing to China’s zero-Covid strategy for most of that year. The year 2023 started on a good footing, with oil output, industrial production and retail sales showing strong growth in the first months. Looking ahead, China’s revocation of its zero-Covid policy in end-2022 should support Kazakh growth in 2023. We forecast average annual real GDP growth to pick up to approximately +3.5% in 2023-2024.

Currency and inflationary risks remain on the cards. Since the massive devaluation of the Kazakh tenge (KZT) in 2014 and the subsequent shift to a floating exchange rate regime, the currency has depreciated by an average annual -14% in 2014-2022. The KZT is particularly vulnerable to external shocks such as the global oil price drop in 2015-2016 or the double whammy of the Covid-19 pandemic and the renewed oil price slump in 2020. In 2022, the KZT exchange rate was quite volatile in line with the ups and downs of the oil price but eventually lost -8% in value against the USD. Hence we expect continued currency volatility and occasional sharp depreciations in response to global or regional shocks in the future. Strong exchange-rate movements also feed through to inflation. The latter rose to an average of 6.8% in 2020 – in contrast to most other countries, which saw falling prices in 2020 – and further to 8% in 2021, 14.9% in 2022 and over 20% in Q1 2023, owing to increased energy and food prices as well as supply disruptions. Since inflation has been well above the 4-6% inflation target range of the National Bank of Kazakhstan (NBK, the central bank) for 2021-2022 (4-5% for 2023-2024), it has steadily raised the key policy interest rate from 9.00% in July 2021 to 16.75% in December 2022. Further rate hikes in 2023 are likely if headline inflation remains sticky and also because the NBK has in the past been trying to rein in currency pressures when needed. Yet, its actions sometimes appear to be somewhat late. For now, we expect headline inflation to gradually fall back to an average of around 14% in 2023 and 7.5% in 2024.

The business environment in Kazakhstan has weakened in recent years and is now slightly below average in our assessment of 185 economies. The Heritage Foundation’s 2022 Index of Economic Freedom survey assigns Kazakhstan rank 64 out of 184 countries, down from rank 34 a year earlier. The significant worsening reflects deteriorated property rights, judicial effectiveness, business freedom and labor freedom while government integrity has remained weak. Moreover, the World Bank Institute’s annual Worldwide Governance Indicators surveys continue to indicate considerable weaknesses with regard to regulatory quality and, in particular, the rule of law and control of corruption. Our proprietary Environmental Sustainability Index ranks Kazakhstan only 140th out of 210 economies, reflecting serious weaknesses regarding renewable electricity output and the recycling rate.

Systemic political risk in Kazakhstan is high. The political regime is considered an autocracy with weak institutional effectiveness. In response to violent social unrest in January 2022, President Tokayev initiated reforms that aim at curbing presidential powers and delegating more powers to parliament, as well as making the registration of political parties easier in an attempt to improve pluralism. The reforms have the potential to significantly improve the political environment in Kazakhstan. However, promises of such reforms (in many countries) have in the past often failed to produce the desired effects. We expect progress on the Kazakh reforms to be slow while potential opposition from political elites could endanger the President's position. Moreover, mismanagement or slow advancement of the reforms could spark renewed social unrest, in particular if the economic situation worsens (for example if inflation remains elevated for longer). Overall, the risks to political stability will remain high in Kazakhstan over the medium term.