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Kazakhstan and Central Asia Business Forecast Report Q1 2015

  • November 2014
  • -
  • Business Monitor International
  • -
  • 38 pages

Core Views

Kazakh economic activity will slow in 2015 and 2016 as production issues at the Kashagan oil field hurt export revenues and private consumption is constrained by rising inflation. However, the outlook over our 10-year forecast period has improved, with the government committing USD5.5bn to promoting economic diversification, a crucial step in weaning Kazakhstan off its hydrocarbon reliance. The increasing frequency of ethnic violence in southern Kyrgyzstan will continue to damage the country's security profile. This will in turn discourage long-term foreign investment and threaten the longevity of the government in Bishkek.
Tajikistan faces two significant security threats in the years ahead; the return of insurgents following the ISAF withdrawal from Afghanistan, and the escalation of border tensions with Kyrgyzstan. These threats will lead to the government forging closer ties with Russia, which already has troops in Tajikistan, while also seeking further
security support from rising power in the region, China. R ising natural gas export revenues will continue to support strong economic growth in Turkmenistan over the course of our 10-year forecast period. While an end to petrol subsidies will likely constrain private consumption growth, this will be more than offset by production from the vast Galkynysh gas field and rising fixed investment from China, the largest investor in Turkmenistan's hydrocarbons sector. W e do not see the recent limited transfer of powers to the Prime Minister in Uzbekistan as a sign that President Islam Karimov has outlined a clear succession strategy or is willing to de-centralise power from his office. While we expect Karimov to remain in power following 2015 presidential elections, uncertainty regarding succession will continue to damage the country's investment profile.

Major Forecast Changes

Tajikistan's exposure to the Russian economy will dampen economic growth over the coming quarters. We have downgraded our forecasts for real GDP growth to 5.1% in 2015 and 2016, from 5.9% and 5.8% respectively, due to the likelihood of uncertainty in Russia weighing on remittance inflows into Tajikistan. Kazakhstan's reliance on hydrocarbons is a key factor behind the downward revision of our real GDP growth forecast for 2015 to 5.0%, from 5.4% previously. Our Oil & Gas team projects the value of total net oil exports to fall from an estimated USD53.8bn in 2012 to USD48.2bn in 2015 due to slowly declining global oil prices, as well as ongoing production delays at the vast Kashagan oil field in the Caspian Sea.

Table Of Contents

Kazakhstan and Central Asia Business Forecast Report Q1 2015
Executive Summary - Regional 13
Chapter 1.1: Political Outlook - Kazakhstan 15
Domestic Politics 15
EU Agreement Does Not Signal Significant Policy Shift 15
Despite the Kazakh government's signing of a bilateral agreement with the EU in October 2014 we do not expect the country to shift
its foreign policy outlook significantly towards Brussels. Kazakhstan remains on course to join the Eurasian Economic Union alongside
Russia, and the EU still has lingering concerns regarding Kazakhstan 's human rights record and its relationship with the Kremlin.
Table: Political Table 15
Chapter 1.2: Economic Outlook - Kazakhstan 17
Economic Activity 17
Growth Set To Disappoint 17
The Kazakh economy is set to record two years of relatively constrained real GDP growth in 2015 and 2016 as global oil prices remain
subdued, export demand from Russia declines and oil production increases at a sluggish pace.
Table: GDP By Expenditure 17
Chapter 1.3: 10-Year - Kazakhstan 19
The Kazakh Economy To 2023 19
Developing Non-Oil Sectors Key To Sustaining Growth 19
The Kazakh government's drive to diversify the non-oil sector and invest in developing strategic industries and national infrastructure
supports our favourable long-term outlook for the economy. Moreover, we believe the growing integration of Kazakhstan into global
markets will help reduce the impact of external shocks and put the economy on a more sustainable growth path.
Table: Long-Term Macroeconomic Forecasts 19
Chapter 2.1: Political Outlook - Kyrgyzstan 21
Domestic Politics 21
A Tinder Box For Unrest 21
Kyrgyzstan will remain one of the most vulnerable states in Central Asia to an uptick in both domestic and external political risks in the
years ahead. Kyrgyzstan's democratically elected government remains weak and fractured, hindered by ethnic strife in the south of the
country, border disputes with neighbouring states, and the ongoing regional 'great power' struggle between China and Russia.
Table: Political Table 21
Chapter 2.2: Economic Outlook - Kyrgyzstan 23
Economic Activity 23
Lack Of Diversity To Dampen Growth 23
Kyrgyzstan's over-reliance on gold exports and remittances, combined with a fragile political environment, will restrict growth and ensure
that the economy remains highly exposed to external shocks over the coming years.
Table: GDP Contribution To Growth 23
Chapter 3.1: Political Outlook - Tajikistan 25
Domestic Politics 25
Investor Conference A Step In The Right Direction 25
Tajikistan held its first international investment conference on October, and along with other signs of reform momentum, this will boost
the country's standing and attractiveness to the international investor community. However, the remaining structural problems of the
economy and the business environment means that we will not see a significant boost to foreign investment any time soon.
Table: Political Overview 25
Chapter 3.2: Economic Outlook - Tajikistan 27
Economic Activity 27
Exposure To Russia Rearing Its Head 27
Real GDP growth in Tajikistan will be curtailed by Russia's economic slowdown and weakening rouble. This will reduce the volume and
value of remittance flows to Tajikistan over the coming quarters.
Table: Economic Activity 27
Chapter 4.1: Political Outlook - Turkmenistan 29
Domestic Politics 29
Assessing The Threat Of Insurgency 29
Turkmenistan remains relatively isolated from the threats of the Taliban in Afghanistan and Islamic State in the Middle East, but the
country's porous borders, lack of a battle-tested military and vast gas network make it an attractive target for any jihadist group seeking
to establish a foothold in Central Asia. It is not our core scenario for an organised insurgency to develop, but we believe Turkmenistan's
defences could be increasingly tested over the coming quarters.
Table: Political Overview 29
Chapter 4.2: Economic Outlook - Turkmenistan 31
Economic Activity 31
Transport Investment To Assist Diversification Efforts 31
The hydrocarbon sector will remain the main driver of Turkmen economic growth as production levels continue to ramp up as the
Galkynysh natural gas field continues to ramp up production. The government's sustained push at investing in transport infrastructure
should also bolster economic growth and assist economic diversification.
Table: Economic Activity 31
Chapter 5.1: Political Outlook - Uzbekistan 33
Domestic Politics 33
Succession Uncertainty, Security Risks Weigh On Political Outlook 33
Succession uncertainty in Uzbekistan will continue to have a damaging effect on the investment climate, especially amid regional
instability and rising external security threats which could amplify the destabilising impact of any internal power struggle in the coming
Table: Political Overview 33
Table: Operational Risk Index 33
Chapter 5.2: Economic Outlook - Uzbekistan 35
Economic Activity 35
Resilient To Regional Headwinds 35
While weaker external demand and foreign remittances will impede more robust GDP growth in Uzbekistan in the short term, the
country will be able to weather regional headwinds without a significant deceleration of real GDP growth rates. That said, we continue to
expect a gradual, long-term decline in growth potential.
Table: Economic Activity 35
Chapter 6: BMI Global Assumptions 37
Global Outlook 37
Reality Check: Uncertainty Reigns 37
Table: Global Assumptions 37
Table: Developed States, Real GDP GrowtH, % 38
Table: Emerging Markets, Real GDP Growth, % 39

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