Kazakhstan Economic and Business Outlook. by Dr Daniel Thorniley August 2018

Transcription

1 Kazakhstan Economic and Business Outlook by Dr Daniel Thorniley August 2018

2 Contents Executive summary Recent corporate comments CIS Comments CIS 2017 Sales and Budget 2018 Business outlook Economic outlook Inflation Currency and interest rates Forecast table 2

3 Executive summary (1) The Kazakh economy picked up from about 1% growth in both 2015 and 2016 to last year The acceleration was due to increased output in the oil sector (as the massive Kashagan oilfield came on stream after many delays) More favourable terms of trade also gave a boost to the manufacturing and service sectors As in other CEE countries, household spending is growing (albeit at a much slower pace than many core central European countries) helped by a stable tenge (after the steep drop in 2015), the 2 increase in pensions and dropping inflation Also helping was the pick up in global growth and higher oil prices The tenge strengthened slightly in real terms This year we estimate that the pace of GDP growth will slow slightly to a still strong 3. (we ve revised that up from our previous forecast of 3. in our last quarterly report thanks to higher than expected oil prices) Kazakhstan, along with Ukraine, will remain at the top of multinationals CIS priorities (though still well behind Russia, of course) Generally, the operating environment in Kazakhstan is generally good by CIS standards and executives often speak well of operating trends, especially compared to neighbouring countries Companies regard Kazakhstan as less corrupt than Ukraine and say red tape is less burdensome than in Russia 3

4 Executive summary (2) After reaching 14. in 2016 (well above the government s 6-8% target), consumer prices have moderated substantially, falling last year to 7. and we believe inflation will be 6.% this year We expect oil to average $71 this year as a whole which is good news for the Kazakh economy The Kashagan oil field is still expected to reach capacity at 370,000 barrels/day in 2018 (the company had previously said it would reach that mark by the end of 2017) Reaching output capacity would important achievement after years of delays in development of the large oilfield The World Bank stresses that Kazakhstan must progress on structural and institutional reforms to transform the current oil-driven and state-run growth model to one that supports a tradable and innovative non-oil sector And while the government has recognized the need to move in that direction, progress has been and will continue to be slow Retail sales grew every month yoy since early 2017, reaching a recent-high of 7.1% in April and 6. in June (though the yearly pace has been slower than last year, averaging 5. for the first six months of 2018 versus 6. in q1 2017) Private consumption is notching up slightly from 1. growth last year to 2.2% this year thanks to rising real wages (though clearly domestic demand is subdued, another factor helping to drive down the inflation rate) 4

5 Executive summary (3) Kazakhstan continues to forge closer ties with China, Iran, the EU (but mostly China the biggest foreign investor in Kazakhstan) China is now estimated to own half of Kazakhstan s oil assets Global economic trends in the Eurozone and decelerating China remain the big influencers Kazakhstan adopted a new tax code at the end of December The lion s share of the code should came into force at the beginning of 2018 but other parts will be phased in in 2019 and 2020 It aims to improve administration and streamline the process in order to tackle tax evasion A few sectors stand to gain: the mining sector will be pleased that the code abolishes the excess profit tax That tax will remain for oil and gas producers but even they will be pleased that a commercial discovery bonus will be eliminated in an effort to entice investors The code also aims to make VAT refund procedures less complicated And abolishes the VAT for the agricultural sector The government has a goal of selling off 900 state-owned companies by 2020 To date, about 420 of those have been privatised, for a total of $630mn Given that pace, and the government s slow track record, we don t expect that it will meet its goal in the next two years 5

6 Executive summary (4) The Kazakh banking sector took a deep hit in the global financial crisis of 2008 and 2009 Non-performing loans have dropped from 32% in early 2014 to just over as of this summer Also in April, President Nursultan Nazarbayev said the government has spent over $9 billion in bailing out the country s banks and financial institutions and has ordered an end to state bailouts He said that despite the massive public support, the banking sector has not issued lending sufficient to drive economic growth Private lending will likely stay depressed in the mid-term compared to previous years 6

7 Recent corporate comments The regional MD of a European industrial conglomerate noted in Moscow this week that: Kazakhstan is of course improving and this year was a good business recovery for us: corporates are buying and there is more investment going on. Price for our products are good and reflect the quality but there is increased Chinese and Asian competition and we now live with that. The local MD of a major European consumer products company also spoke warmly: 2015 was very tough and 2016 a bit soft but most of 2017 has seen a steady improvement. We are growing at about 5- in local currency and still able to introduce some price rises more easily than in Russia. The currency is either stabilising or getting stronger which helps and we feel that the market is starting to get back or even strong again. But we are always cautious. The local MD of a US IT company noted in a phone interview this week that: Yes, as others note, 2015 was brutal for us and 2016 a bit better and 2017 much better but we are only growing at 5- and expectations are higher at headquarters. I need to get growth and profits increasing by more than 1 and I actually think this is feasible for

8 CIS - Comments Executives see the non-russian CIS markets as business neutral at the moment for their Russian business About 2.5 years ago when Russia was slumping and Kazakhstan and Azerbaijan were doing relatively well, the CIS markets were helping Russian business But the devaluations which followed in Kazakhstan, Belarus and Azerbaijan took most of the shine off CIS markets As the non-russian markets also recover, they are certainly no longer negative to overall regional business but our Surveys suggest business neutral For some 20 years now for non-energy manufacturing companies, Russia has represented 85-9 of sales while the other markets made up 1. Until 2014, Ukraine was traditionally the No 2 market but the recent conflict has reduced Ukrainian business in absolute and relative terms and Kazakhstan is now almost an equally important market for many companies But the Caucasus markets represented in the past and also today no more than 1- of total CIS sales for a standard western company Of the 3 Caucasus markets, Georgia is performing the best in terms of top-line sales growth and based on comments from regional managers, and Georgia is getting some good corporate reports currently 8

9 Russia/CIS Business Survey April 2018 Sales 2017 and Budget 2018 in local currency 9

10 Russia/CIS Business Survey April 2018 Peformance expectations 2018 for the CIS markets 10

11 Corporate Sales and Profit Trends (1) We conduct two Surveys of the Kazakh market: one which compares another 23 CEE and CIS markets and one which compares it with just CIS markets The results may vary slightly depending on Survey timing and market focus Russia still dominates the Russia-CIS region It has by far the biggest volume market and total sales that are between 85-9 of the non-russian CIS market But regarding the question of whether CIS markets will support the total Russia-CIS region there has been improvement over the last 6-9 months The number of respondents that report positive sales growth in 2018 has increased: for the Ukraine 81% (7 in 2017), for Kazakhstan 82% (7 in 2017) and for Belarus 72% (6 in 2017) And results in our CEE survey were similar, with 8 of firms saying sales are up this year (more than one third say they ll grow in the double digits) Just 1 reported a decline in sales (with half saying sales would drop in the double digits) and say sales will be flat Looking ahead to 2019, Kazakhstan has the highest percentage of firms in all of CEE forecasting for double digit growth next year (3 of respondents say sales growth will exceed 1) The second highest response in this category is Ukraine, with 28% of firms saying sales growth will be in the double digits 11

12 Corporate Sales and Profit Trends (2) The professional services (including IT & banking) sector is the top performing segment of the economy in Kazakhstan this year 10 of firms tell us sales are growing (no other sector can make that claim in this market) And a full 62% of respondents say revenues are increasing by double digits (the other 38% say sales growth is low or single digit) Profits on the other hand are not as robust, with just over a quarter saying profits are either falling or flat and three-quarters telling us sales are up in the low single or low double digits For next year, firms are a more mixed in terms of expectations, with a full 1 saying sales will likely be flat Meanwhile 4 tell us revenue growth will be in the single digits and another 4 say they believe revenues will grow up to 1 Consumer products (including food & beverages) companies performed well last year and while the vast majority say sales are up this year, a notable say sales are falling and tell us revenue is flat On the other hand, 3 report double digit growth (with reporting revenues up more than 3!) Almost half say sales are growing in the low or high single digits Looking ahead to next year, foresee a drop in sales, tell us sales will be flat; 4 are planning for single digit growth; and 4 say sales will grow in the double digits 12

13 Corporate Sales and Profit Trends (3) One in five execs in the Kazakh healthcare/pharma sector say sales are picking up to 2 Meanwhile three in five say sales growth is in the single digits and just one in five is reporting flat sales When it comes to profits, there s a similar split with one in five respondents telling us proftits are flat, three in five saying they re seeing single digit growth of their bottom lines and the other one in five reporting growth in the low double digits And similar to the results above, another 2 of firms expect flat revenues for 2019 and 8 say sales will pick up The industrial B2B sector is having the roughest year 1 are seeing a drop in revenue and another 8% say sales are flat On the other hand, one in two say sales are up in the single digits and the other 2 report dougle digit revenue growth (with 8% saying sales are up more than 3) For next year, 1 tell us sales will drop in the single digits, another 1 are forecasting flat sales Meanwhile 5 say sales will grow in the double digits and 3 of firms are more optimistic about next year, forecasting revenue growth in the double digits 13

14 CEE Business Survey June 2018 Revenue Growth Forecast 2018 by Country (in %) - All Industries Source: CEE-Russia Business Group, June 2018 survey Decline of more than 1 Decline of 1 to 1 No growth 1 to growth 5-1 growth 10-1 growth 15-2 growth 20-3 growth Over 3 growth Albania 4 2 Armenia 4 Azerbaijan 1 32% 32% 1 Belarus 2 21% 2 Bosnia-Herzegovina 32% 32% 1 Bulgaria 1 3 Croatia Czech Republic 4 28% 1 Estonia 21% 2 2 Georgia 2 2 Hungary % 21% Kazakhstan 2 21% 1 2% 2% Latvia Lithuania Macedonia Poland 1 3 Romania % Russia 1% 1 28% 1 Serbia 32% 32% Slovakia Slovenia 2 41% 2 1 Turkey 1 8% 2 2 8% 1 Ukraine

15 CEE Business Survey June 2018 Profit Growth Forecast 2018 by Country (in %) - All Industries Source: CEE-Russia Business Group, June 2018 survey Decline of more than 1 Decline of 1 to 1 No growth 1 to growth 5-1 growth 10-1 growth 15-2 growth 20-3 growth Over 3 growth Albania 5 21% Armenia 42% 3 Azerbaijan 4 3 Belarus Bosnia-Herzegovina 3 4 Bulgaria 18% 5 1 Croatia Czech Republic % 1 Estonia % 2 Georgia 2 4 Hungary % Kazakhstan 2 1 Latvia 18% 2 2 Lithuania 3 3 Macedonia 3 3 Poland 3 Romania 8% % Russia 8% 1 18% 18% 1 Serbia 18% 5 1 Slovakia % Slovenia Turkey 18% 4 Ukraine

16 CEE Business Survey June 2018 Revenue Growth Forecast 2019 by Country (in %) - All Industries Source: CEE-Russia Business Group, June 2018 survey Decline of more than 1 Decline of 1 to 1 No growth 1 to growth 5-1 growth 10-1 growth 15-2 growth 20-3 growth Over 3 growth Albania % Armenia 32% 2 21% Azerbaijan 6 Belarus 3 4 Bosnia-Herzegovina 31% 38% 2 Bulgaria 5 3 Croatia Czech Republic Estonia Georgia 2 4 Hungary Kazakhstan Latvia Lithuania 38% 38% Macedonia 31% 38% 2 8% Poland 3 Romania 41% 32% Russia 2 3 2% Serbia Slovakia 6 1 Slovenia 61% Turkey Ukraine 32% 2 1 8% 10 16

17 CEE Business Survey June 2018 Profit Growth Forecast 2019 by Country (in %) - All Industries Source: CEE-Russia Business Group, June 2018 survey Decline of more than 1 Decline of 1 to 1 No growth 1 to growth 5-1 growth 10-1 growth 15-2 growth 20-3 growth Over 3 growth Albania 4 38% 1 Armenia 5 2 Azerbaijan 2 6 Belarus 3 4 Bosnia-Herzegovina 3 5 Bulgaria 1 52% 2 Croatia 32% 42% 21% Czech Republic Estonia % Georgia 4 31% 2 Hungary 1 52% 1 Kazakhstan % 21% Latvia % 38% Lithuania Macedonia % Poland 2 32% 2 Romania 18% 41% 18% 1 Russia % 2% Serbia Slovakia 3 52% 1 Slovenia 4 41% Turkey 3 Ukraine 1 32%

18 Economic outlook (1) GDP outlook After two years of sluggish GDP output, the economy expanded in 2017 exceeding all expectations We believe the Kazakh economy will slow slightly but still grow at a respectable 3. in 2018 (we ve revised our forecast up slightly from our previous report) Higher oil prices, improved global demand and stronger industrial output have been key drivers of growth in the Kazakh economy since last year Oil production is scaling up with the Kashagan oilfield roaring toward capacity (which it should reach at some point this year) Manufacturing and electricity are also contributing to growth But we think that as Kashagan reaches capacity, oil output will slow, dragging the industrial sector and acting as a drag on GDP In GDP growth will average close to with some small upside risk (this would be higher were it not for the slowdown in Russia) Higher wage growth and a stronger credit climate will boost private consumption The switch to the free-floating exchange rate in August 2015 and subsequent steep depreciation proved to be a major drag on economic output Which pushed down real wages and household spending Fluctuations last year were much more moderate than 2015, though after several months of depreciation, the NBK did say it was prepared to defend the currency The value of the tenge largely reflects fluctuations in oil prices 18

19 Economic outlook (2) GDP outlook For many years now the government has prioritised efforts to diversify the economy away from the extractive sector (the main driver of growth in the past two decades) Progress has been slow but there are signs that the pace has picked up This continues to be a major investment opportunity As part of its privatisation programme, the government has said it will sell large stakes in 900 companies by 2020 As of June, some 420 companies had been sold for a total of $630mn Air Astana, Kazatomprom and Kazakhtelecom are expected to be offered as IPOs There ve been recent reports that the government may offer pre-ipos in these companies to strategic investors before the stocks go public In July, Kazakhtelecom (the government controlled land line giant) got permission to acuire the leading mobile phone company Kcell...the state holding company says it will issue shares in the expanded Kazakhtelecom in the second half of this year Shares of five additional flagship companies are planned for 2020: the oil and gas company KazMunayGas, the state-owned mining company Tau-Ken Samruk, the postal service, railway operator and power company Samruk-Energo The Astana International Financial Centre, which the government wants to be a hub for Islamic finance, officially launched this June after hosting the Astana Fair last September 19

20 Economic outlook (3) GDP outlook Kazakhstan will issue $300mn in sukuks (government bonds based on Islamic law) at the AIFC by the end of this year AIFC is particularly geared as a financial hub for investors in China, Central Asia, Europe and the Middle East The government is increasing spending on real estate, private equity and hedge funds in an effort to boost returns...and has been embarking on a large scale programme to purchase non-performing loans in an effort to support the banking sector Investment from China is fueling infrastructure projects across Kazakhstan and China will remain a major player in the market in the medium term (Though China s dominance is controversial domestically) China is now estimated to own half of Kazakhstan s oil assets Oil and extraction, construction, agriculture, transportation and manufacturing were the big winners for FDI Kazakhstan is now a full member of the WTO, another strong point for the economy 20

21 Economic outlook (4) GDP outlook Business confidence climbed through 2017, reaching a high of 11 last summer before falling to 4 at the start of 2018 and moving back up to 9 in July Industrial production, after falling 1.1% in 2016, shot up to 7.1% last year In the first half of this year industrial output expanded 5.2% (compared to 7.8% in the first half of 2017) Industrial output so far this year has been driven by a pick up in oil production For the year as a whole, we believe industrial output will grow 4. this year (slowing a bit from the year before as Kashagan hits capacity) and 5. next The banking sector is still lagging from the terrible days of 2008 and 2009 As of June, 9.1% of loans in the country wer considered NPL (compared to 31% in 2014) And the government is working to purchase NPLs and support banks - last October the National Bank unveiled a $1.2bn bailout package for four commercial banks Though earlier this year the president said the government would put the breaks on its program of bailing out banks that led to a run on several second-tier banking institutions The sector continues to pose risk to the economy 21

22 Economic outlook (5) government spending After the devaluation of February 2014, the government went into stimulus mode to combat falling growth and that continued through last year According to the National Bank of Kazakhstan and the Ministry of Finance, the government budget deficit totaled -1.8% in 2017 Compared to -0. the year before This is a result of higher spending to support the banking sector (specifically, the country s programme of purchasing non-performing loans) Much spending is off-budget though, including investments via loans financed by the sovereign wealth fund, which now totals $67bn Large infrastructure investment projects have benefited from the increase in government spending, with several major transport and logistics projects in the works For this year, the government s budget predicts a deficit of -1. of GDP and 3.8% GDP growth That figure hasn t been revised up since April and thus is based on a $55/barrel oil price We now forecast oil to average $71/barrel this year, so the deficit is likely to come in closer to -1.2% of GDP 22

23 Economic outlook (6) consumer spending Although private consumption has been driving economic growth in much of CEE, the situation is a bit different in Kazakhstan Household spending grew just 1. last year down considerably from the days before 2014 and quite muted when evaluated on a CEE-wide basis Real wages had been falling (a drag on household spending) but this has turned around And the 2 rise in pensions is helping consumers feel more confident and should continue to help going forward We believe stronger wage growth and better credit conditions will push private consumption to 2. this year and 4. next The government announced that it s launching a new programme aimed at encouraging home buying The programme launched in July to offer mortgages with a interest rate for people who put a down payment of 2 for a 25 year loan The programme is for first time homebuyers and replaced the country s previous affordable housing scheme 23

24 Inflation and interest rate outlook Inflation averaged 14. in 2016, a result of the tenge s devaluation of 2015 The tenge appreciated in the first four months of 2017, which helped bring inflation down Stronger oil prices last year also helped For the year as a whole, inflation came in at 7. (this is, importantly as noted above, within the National Bank s target) In the first half of this year, lower food prices led to some disinflation from 6.8 at the beginning of 2018 to just 5. in June A depreciation of the tenge in the second quarter will result in some pick up in inflation going forward, but we believe it will average 6. for this year and 5.8% next Kazakhstan s central bank has cut its policy rate by 25 points for the fourth time this year, citing declining inflation expectations The policy rate now stands at (and it held that rate steady at its July meeting) This is down from a peak of 1 in February 2016 Monetary policy will likely remain quite tight in the coming years as inflation falls 24

25 Currency outlook After the sharp depreciation in 2015 (that broadly mirrored the collapse in global oil prices) the tenge appreciated in 2017 by about versus the usd This was a result in the pick up of oil prices and higher exports Strong oil prices have year lent some support to the currency but on the other hand the weaker Russian rouble was a drag downward The tenge is still closely tied to the Russian rouble When the US imposed a new round of sanctions on Russia in April, the rouble took a nosedive as did the Kazakh currency, and depreciated again in late May With our forecast for oil prices at $71/barrel for the year, and if the US doesn t impose more sanctions on Russia, we expect the tenge to average about 336 against the dollar this year and 338 next 25

26 Statistics 26

27 Disclaimer 2018 DT Global Business Consulting GmbH DT-Global Business Consulting GmbH Keinergasse 8/33, 1030 Vienna, Austria, Company registration: FN t Source: DT Global Business Consulting GmbH. This material is provided for information purposes only. It is not a recommendation or advice of any investment or commercial activity whatsoever. DT Global Business Consulting GmbH accepts no liability for any commercial losses incurred by anyparty acting on information in these materials. Contact: Dr Daniel Thorniley, President DT Global Business Consulting GmbH E: danielthorniley@dt-gbc.com 27