| Kazakhstan: Macroeconomic Situation |
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21/07/2008 05:09 (780 Day 10:54 minutes ago) | |||||
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The FINANCIAL -- In the first half of 2008, Kazakhstan's economy was still on course for moderate growth. Consumer demand was supported by accommodative fiscal and monetary policies.
On top of that, local businesses continue to thrive as the share of companies with a return on sales exceeding 40% grew to 20.8% in the first quarter of 2008 (compared to 18.6% at the end of 2007). More importantly, small and medium enterprises reported higher profitability, benefiting from the recent elimination of some administrative and regulatory barriers to business activities. Meanwhile, according to the Business Activity Survey, released by the Agency on Statistics of Kazakhstan (ASRK), real-estate developers continue to suffer from increasing costs of construction materials, sluggish demand and falling housing prices.
In January-May, industrial production increased by 3.8% yoy on the back of accelerating output in the mining sector, which was up by 6.7% yoy. Crude oil extraction advanced by 7.2% yoy and totaled 24.3 million tons. Output in manufacturing remained virtually flat, marginally declining by 0.7% yoy. Above all, a moderation of the local construction sector weakens demand for construction materials. Indeed, production of non-metal mineral products was down by 22.4% yoy as production of bricks, cement and concrete products shrank by 16.9% yoy, 10.9% yoy and 35.8% yoy, respectively. Fuel processing and chemical industries grew by a humble 4.7% yoy and 1.8% yoy, respectively (compared to 18.5% yoy and 34.2% yoy a year ago). Tight production capacities in the domestic fuel processing industry may partially explain this trend.
Furthermore, higher prices of gasoline and fertilizers may have dented demand for primary products of these industries. Finally, output in food processing has recovered for the first time since the beginning of the year, as the manufacturing sector posted a modest increase of 1% yoy in January-May.
Facing tightening supply and transit capacities, the government continues to develop vital infrastructure in the energy sector. Official projections of crude oil production were increased to 150 million tons by 2015 from the current 70 million tons per year.
A purchase of the Georgian Batumi port by the national oil company KazMunaiGaz is expected to increase the oil transit capacity of the Baku-Supsa oil pipeline. On top of that, an alternative export route to China will allow for shipping of 20 million tons per year. Finally, the upgraded Caspian Pipeline Consortium will provide capacity for an additional 50 million tons of crude oil per year.
As crude oil prices are anticipated to continue their record- breaking run amid tightening global supply and strong demand for energy from emerging markets, Kazakhstan will definitely benefit from growing oil extraction. Furthermore, lingering uncertainties surrounding key oil exploration projects are likely to abate as Kazakhstan has recently agreed to postpone the start of commercial production at the Kashagan oil field until October 2013. This will give a consortium of private investors developing the Kashagan oil field more flexibility to complete the project on schedule as costs are estimated to swell from USD 100–130 billion to USD 150 billion. In addition, there are some changes in the royalty structure of the production sharing agreement, which should ensure a more stable tax regime for the consortium and reduce risks to investors. In particular, the consortium will pay 3.5% of output to the government at global prices above USD 45 a barrel, 7.5–8% at USD 130, and 12.5% at USD 195.
Kazakh agriculture continues to reap the benefits of good harvests and high world prices for staple foods. Indeed, during the last harvest season, Kazakhstan managed to secure record high grain export revenues, earning USD 2 billion from exports and an additional USD 1 billion from sales at the domestic market. This year, Kazakhstan is expected to harvest 16–17 million tons of grain. In 2007, the total volume of harvested crops reached 20 million tons, up by 22% yoy, largely due to favorable weather conditions and extraordinary gains in yields.
Fiscal Policy In January-May, the state budget registered a deficit of KZT 16.56 billion (USD 138 million) or about 0.1% of projected full year GDP. Budget expenditures grew by 27.9% yoy in nominal terms while budget revenues advanced by 26.4% yoy. This year, the state budget is fundamentally supported by generous transfers from the National Oil Fund (NFRK), which amounted to USD 2.35 billion growing by 167% yoy against January-May 2007. Indeed, while tax revenues remained strong (increasing by 17.2% yoy), their share in total budget revenues narrowed to about 75% from 81% a year ago. At the same time, the share of NFRK transfers in budget revenues more than doubled to 21% from below 10% in January-May 2007.
All told, higher volumes of NFRK transfers to the state budget generated nearly two thirds of the growth of budget revenues during the first five months of this year. This means that Kazakhstan's fiscal position remains rather sensitive to the performance of the national energy sector. At present, this link helps to maintain the strength of the country's budget as decelerating non-oil tax revenues (due to slower economic growth) are compensated with tax proceeds from booming crude oil exports. Furthermore, this strength endows the government with the sufficient spending flexibility to revitalize economic activities with various fiscal stimuli.
Equally important, ongoing initiatives to rationa lize Kazakhstan's taxation system bode well for economic development. At the end of June, the government presented a draft of a new Tax Code, which is expected to be approved by the Parliament this fall. Above all, this Tax Code is designed to simplify and streamline tax administration and align tax accounting with international standards. In particular, its provisions aim to minimize paper work, reduce the number of mandatory tax procedures and forms, consolidate and synchronize tax payments and tax reporting and introduce risk-based supervision of tax compliance. A national tax control is to observe the EU standards of tax compliance management by dividing taxpayers into two groups based on the estimated tax evasion risk, which helps to prevent discretionary and biased tax inspections.
This means that companies with a moderate tax evasion risk will benefit from a more lenient supervision by tax authorities. Impartial and occasional tax inspections as well as a wider application of electronic tax reporting will be introduced to reduce corruption and improve fairness and transparency of tax administration. In addition, the government wants to reduce tax exemptions and unify tax privileges given to special economic zones (SEZs) and preferential investment projects. Finally, special provisions are included to guarantee stability and predictability of the national tax system.
Other Developments Affecting Investment Climate
Kazakhstan and the World Bank have agreed to jointly finance a USD 2.5 billion road project to upgrade the trade route between Asian countries and Europe.
The World Bank will help to finance and repair the 1,025 km road between Shymkent and Aktobe. This initiative is part of a USD 7.5 billion project to upgrade the 2,800 km road corridor from Kazakhstan's border with China to the border with Russia. The project is expected to be launched in 2009 and will become the largest infrastructure project of the World Bank in Central Asia.
The European Bank for Reconstruction and Development (EBRD) will create the Kazakhstan Growth Fund to support private companies in non-extractive industries. The fund will provide equity or equity related investments, improve corporate governance and transparency as well as support the development and restructuring of medium-sized companies. This fund (with USD 125 million in capital) will be jointly established by the EBRD and the Kazyna Sustainable Development Fund and will focus on non-extractive manufacturing sectors, including construction materials, food processing, metallurgy and textiles.
The government will allocate an additional KZT 160 billion (about USD 1.33 billion) to support the development of small and medium enterprises (SME). In particular, USD 415 million will be provided to the Kazyna Sustainable Development Fund to issue loans to SMEs in Astana and Almaty. The same amount will be lent to Kazakh commercial banks at a 7.5% interest rate to issue loans to SMEs in Astana and Almaty at a 12.5% interest rate (currently 22%). Finally, local budgets will spend about USD 400 million to issue credit to regional SMEs.
written by Leilya Shamelova, Edilberto L. Segura.
Copyright© SigmaBleyzer, 2007.
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