kazakhstan economic boom continues in a favourable external environment 15th bacee country and bank...

KAZAKHSTAN

ECONOMIC BOOM CONTINUES IN A FAVOURABLE EXTERNAL

ENVIRONMENT

15th BACEE Country and Bank Conference

14-16 November 2006, Budapest

9th largest country in the world by territory Geographical and geopolitical situation largely define politics Balancing between powerful neighbours Large area (2.7 M km2 ) with low density of population (5.6 persons/km2), 15.146 M

inhabitants Rich in natural resources (oil, uranium, chromium, silver, gold, nickel, phosphor,

grain, coal), but unfavourable climate Ethnically mixed population decreasing by 10% in the 90s, stabilises by now, incl.

50% Kazakhs, 37% Russians. Russian is the second official language. Possible fluctuation of oil prices represents the major challenge to the Kazakh

economy Per capita GDP at PPP: USD 7,800 (no. 91 in the world), higher than Romania, Iran,

Turkey, close to Brazil, Thailand



Political situation/1

Independence since 16 December 1991

Presidential state (Nursultan Nazarbayev, 66), 1977: Secretary of the Central Committee of the Communist Party of Kazakhstan, first elected as president in 1991

No clear mechanism for transfer of power

Relatively quiet political scene

2004: parliamentary elections, governing party wins, President’s daughter wins 11% of votes



Political situation/2

Presidential elections: 4 December 2005 President Nazarbayev re-elected with 91.15% of votes (for 7 years)

Social situation improving, although benefits do not spread evenly

Average monthly salary grows by 17.6% in real terms in a year; by 26.4% in nominal terms

12-year plan ”Innovative Industrial Development Strategy for the RK” for 2003-2015

Foresees interventionist economic policy, important role for the state due to ”imperfect markets”



Foreign policy based on balance of interests /1

Russia – good relations, co-operation in energy policy, mutual investments, CIS,

Russian language second state language

Eurasian Economic Community, Single Economic Space, SCO

EU – energy policy, FDI, KZ wants to chair OSCE

US – support of anti-terrorist campaign,

energy, President Bush to visit KZ in 2006

KZ to join to BTC oil pipeline

China – energy – completion of direct oil pipeline,

plan to build gas pipeline (incl. TM, UZ gas). World’s largest regional thermal

power station to be built in Ekibastuz, export of electricity to China,

President Hu Jintao to visit KZ in 2006

Shanghai Co-operation Organization



Foreign policy based on balance of interests /2

India – negotiations on oil exports

WTO – KZ to join in 2006

”Kazakhstan is not purely Asian. An important part of KZ territory is in Europe” – Kasymzhomart Tokaev, Foreign Minister of KZ



Different stages of economic development after 1991

Post-independence crisis

Macroeconomic stabilisation

Recovery in 1996 - July 1998

Russian crisis in 1998

2000-2006: Economic boom led by high energy prices

KZ to join WTO in 2006



Oil sector’s share in GDP exceeds 20%. Further diversification of the economy necessary, because of risk of external shocks

Source: NBK

GDP growth

-1,9

2,7

9,8

13,5

9,8 9,2 9,4 9,2 9,3 8,8

-5

0

5

10

15

1998

1999

2000

2001

2002

2003

2004

2005

2006

H1

2007

-9 av

erag

e(p)

%



Growth of industrial output slows down in 2005, accelerates in 2006.

Currency appreciation may undermine international competitiveness of non-hydrocarbon sector

Source: NBK

Industrial output (growth, y-o-y)

13,5

9,88,8

10,1

4,6

6,8

0

24

6

8

1012

14

16

2001 2002 2003 2004 2005 2006

%



Large investments needed in all sectors to maintain quick growth

Source: NBK

Investment in fixed capital (growth y-o-y, %)

2119

10,6 10,6

22,1

0

5

10

15

20

25

2001 2002 2003 2004 2005



Already low official unemployment rate declines further

Rate of unemployment

2,92,6

1,81,5

1,2 1,1

0

0,5

1

1,5

2

2,5

3

3,5

2001 2002 2003 2004 2005 Sep 2006Source: NBK



Fiscal policy

Fiscal policy has played a major role in containing aggregate demand

and inflationary pressures

General government balance as a % of GDP (without off-budgetary funds)

0,30,6-0,3-1,1

1

-0,1-0,8-5-7,8

-10

-8

-6

-4

-2

0

2

1998 1999 2000 2001 2002 2003 2004 2005 2006H1

Source: NBK



*Average monthly rates, except 2 October 2005

KZT slowly appreciating against USD and EUR. Further real appreciation expected if export earnings continue to grow quickly.

Source: NBK

Exchange rate (2004-2005)*

100110120130140150160170180190

2004

Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

neJu

ly

Augus

t

Septe

mber

Octobe

r

Novem

ber

Decem

ber

2005

Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

neJu

ly

Augus

t

Octobe

r

2006

Mar

chJu

neJu

lyAug

SeptOct

USD/KZT

EUR/KZT



Oil, gas/1

Proved reserves: 29.0 bn bbl Kashagan deposit fifth largest in the world, the largest outside, the Middle East and

the largest one discovered in last 30 years. Production to start in 2008, development cost: USD 29 bn

May 13, 2002: President Putin and President Nazarbayev sign protocol on division of Northern part of Caspian Sea (vs. tensions between Iran/Azerbaijan, Turkmenistan/Azerbaijan)

- some major oil fields divided 50/50, others given to Russia or Kazakhstan, divided fields to be developed jointly

15-year agreement signed with Russia on use of the Russian pipeline system to export Kazakh oil

Plan of oil and gas export to China, pipeline construction underway. Gas pipeline also could be used for transportation of Uzbek and Turkmen gas

Largest oil producers: Tengiz Chevroil JV 13.7 M t (23.1% of total), KazMunaiGaz (state-owned) 8.9 M t, Karachaganakh Petrol 8.5 M t

More difficult conditions for foreign investors: state-owned KazMunaiGaz must own at least 50% in any product-sharing agreement (PSA)

Share of KZ government in oil income raised to 85% through progressive ”rent tax” obligatory state stake



020406080

100120140160180200

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 2010(plan)

2015(plan)

Kazakh oil and gas condensate production in M t

2005 oil output grows by 3.4% after 15.4% in 2004

Plan: by 2015 KZ should become one of world’s top-5 oil producers



1. Saudi Arabia 11.1

2. Russia 9.5

3. USA 8.2

4. Iran 4.2

5. Mexico 3.8

6. China 3.8

7. Canada 3.1

8. Norway 3.0

9. Venezuela 2.8

10. UAE 2.8

11. Kuwait 2.7

12. Nigeria 2.6

13. Algeria 2.1

14. Brazil 2.0

… Kazakhstan 1.22(2010:

2.40)

Top world oil producers 2005 (M bbl/day)

1. Saudi Arabia 9.1

2. Russia 6.7

3. Norway 2.7

4. Iran 2.6

5. UAE 2.4

6. Kuwait 2.3

7. Nigeria 2.3

8. Venezuela 2.2

9. Algeria 1.8

10. Mexico 1.7

11. Libya 1.5

12. Iraq 1.3

13. Kazakhstan 1.1

14. Quatar 1.0

Top world oil exporters 2005 (M bbl/day)



1. Saudi Arabia 264.3

2. Canada 178.81

3. Iran 132.5

4. Iraq 115.0

5. Kuwait 101.5

6. UAE 97.8

7. Venezuela 77.2

8. Russia 60.0

9. Libya 39.1

10. Nigeria 35.9

… Kazakhstan 29.0 (est.)

Greatest oil reserves by country, 2006 (proved reserves, bln bbl)

1includes 174.5 bn of oil sand reserves

Estimates on KZ oil reserves differ (Kashagan field alone may contain 50 bln bbl oil, accurding to official KZ sources)



Oil revenue represents one-third of budget’s income

Main export routes

CPC (Caspian Pipeline Consortium) RU-KZ-Oman – Mobil/Agip/BG/Rosneft/Shell; opened in 2001, terminal: Novorossiysk; 1,580 km, capacity to be expanded to 58 M t / year;

Atyrau-Samara; prior to CPC the main export road; capacity 15 M t/year, to be increased to 25 M to

swaps via Iran

by rail to Russia

by barge across the Caspian to BTC

possibilities: extension of BTC, new pipeline through Iran, West Kazakhstan – China

(first stage completed in 2005)

Gas pipeline

Central Asia – Center pipeline to be modernized, increase capacity to grow to 100 bn c.m. per year



Development of hydrocarbon reserves in the Kazakh sector ot the Caspian Sea

Division of territory with Russia

KZ has 40-45% of total Caspian offshore hydrocarbon reserves ( total: 125 bn barrels), Azerbaijan 20-25%, Iran 6%, TM 12-13%, Russia 12%

May 2003: 3-phase state program approved

Stage 1: 2003-2005 preparations for complex development, creation of unified database, construction of infrastructure, facilities, tendering

Stage 2: 2006-2010 quick growth of production.

Stage 3: 2011-2015 stabilisation of output.

Offshore oil production to grow to 90 M tonnes p.a., gas to 63 bn cubic meters p.a.



Pipelines to China

Total length 3000 km, construction cost USD 3 bn First section completed in 2003 Second section (about 1,000 km) to be completed in December 2005

Sale of Petrokaz to Chinese CNPC

• CNPC launches USD 4.18 bn bid for 100% of Petrokaz in August 2005 (Toronto-listed oil company)

• Kazakh energy minister: Kazakh state wants to have strategic control over Petrokaz through KazMunaiGaz which gets 33% in Petrokaz

• ”KZ believes oil assets were sold too cheaply to foreign investors in the 1990s. It is how funding to claw back control” (D. Loukastor, analyst)

• Petrokaz produces 7 M t of oil, owns one of KZ’s 3 refineries



Other commodities• Coal (87 M t in 2005)• Natural gas (15 bn c.m in 2005, 39 bn c.m. planned for 2009)• Grain• Metals (copper, zinc, uranium, iron, ore, gold, silver)

Gold

KZ No. 9 in the world by gold resources• Reasons for dropping production: outdated technology, relatively small fields

except Vasilkovskoye (one of world’s largest import)• Kazakh Gold floats 25% of shares on LSE in 2005

KZ Gold production (kg)

1996 1997 1998 1999 2000 2001 2002 2003 2004 20052006 Q1-Q3

10,1 9,9 8,8 9,655 11,529 15,226 10,954 9,906 9,579 9,788 6,602



Agriculture

Large uncultivated territories until 1950’s KZ ‘to become USSR’s bread-basket’ Harsh climatic conditions, sharp changes in agricultural output 2005: good year, agricultural production increases by 6.7%, grain: +9.4%,

livestock: +4.5%, oilseed: +11.1%



CPI/1

-20

-10

0

10

20

30

40

50

60

70

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Q3

CPI (y/y changes)

IPI (y/y changes)

1994: CPI: 1158,3 ; IPI: 1923,8

1995: CPI: 60,3 ; IPI: 40,2



CPI/2



NBK's refinancing rates

0

50

100

150

200

250

300

350

Feb

-92

Ap

r-92

Jun

-92

Au

g-9

2

Oct

-92

Dec

-92

Feb

-93

Ap

r-93

Jun

-93

Au

g-9

3

Oct

-93

Dec

-93

Feb

-94

Ap

r-94

Jun

-94

Au

g-9

4

Oct

-94

Dec

-94

Feb

-95

Ap

r-95

Jun

-95

Au

g-9

5

Oct

-95

Dec

-95

Feb

-96

Ap

r-96

Jun

-96

Au

g-9

6

Oct

-96

Dec

-96

Feb

-97

Ap

r-97

Jun

-97

Au

g-9

7

Oct

-97

Dec

-97

Feb

-98

0

5

10

15

20

25

30

Ma

r-9

8

Ma

y-9

8

Ju

l-9

8

Se

p-9

8

No

v-9

8

Ja

n-9

9

Ma

r-9

9

Ma

y-9

9

Ju

l-9

9

Se

p-9

9

No

v-9

9

Ja

n-0

0

Ma

r-0

0

Ma

y-0

0

Ju

l-0

0

Se

p-0

0

No

v-0

0

Ja

n-0

1

Ma

r-0

1

Ma

y-0

1

Ju

l-0

1

Se

p-0

1

No

v-0

1

Ja

n-0

2

Ma

r-0

2

Ma

y-0

2

Ju

l-0

2

Se

p-0

2

No

v-0

2

Ja

n-0

3

Ma

r-0

3

Ma

y-0

3

Ju

l-0

3

Se

p-0

3

No

v-0

3

Ja

n-0

4

Ma

r-0

4

Ma

y-0

4

Ju

l-0

4

Se

p-0

4

No

v-0

4

Ja

n-0

5

Ju

l-0

5

Ap

r-0

6

No

v-0

6

Rate raised from 7% to 7.5% in February 2005, to 8% in July 2005, to 8.5% in April 2006, 9.0% in July 2006



Current account

366,1529,6

214,1

-724

-270,1

-1024,3-1389,5

-235,97

-1500

-1000

-500

0

500

100019

99

2000

2001

2002

2003

2004

2005

2

005

H1in

US

D M

Source: NBK



Share of non-CIS countries in exports 85.4%, in imports 53.2%. In 2005, trade surplus grows further (43.5%), share of CIS shrinking

Export/Import

0

5000

10000

15000

20000

25000

30000

1999 2000 2001 2002 2003 2004 2005 2006H1

in U

SD

M

Exports FOB

Imports FOB

Source: NBK



Switzerland 19.7% Russia 38.0%

Italy 15.0% Germany 7.4%

Russia 10.8% China 7.1%

France 9.4% USA 7.1%

China 8.9% Ukraine 4.7%

Netherlands 3.1% Italy 4.0%

Iran 3.0% Japan 3.4%

Israel 2.3% UK 2.5%

USA 2.3% Turkey 2.3%

BVI 2.0% France 1.7%

Canada 1.9%

: :

: :

Germany 1.4%

Kazakhstan – Top trading partners (2005)

Exports Imports



Ballooning trade surplus

Trade balance

340,28

2439,871320,48

2300,64088,18

6719,3 7368

10497

02000400060008000

1000012000

1999 2000 2001 2002 2003 2004 2005 2006H1

in U

SD

M

Source: NBK



Oil export

Value (bn USD)

11,4

17,4

2004 2005

Volume (M t)

52,4 53,9

2004 2005



Services deficit eats up to 40-50% of trade surplus

Balance of services (in M USD)

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

2000 2001 2002 2003 2004 2005 2006 H1

Income

Expenses

Balance

Source: NBK



Largest investors in 2005 Q1-Q3:, The Netherlands (1070.6 M), US (759.5 M), France (525.0 M), Japan (238.7 M), Liberia (237.0 M) Canada (224.0 M), Italy (213.4 M), Russia (158.2 M), China (153.6 M), Cayman Islands (144.6 M), British Virgin Islands (98.6 M), Switzerland (76.6M), Germany (61.3 M)

Outflow of investments to UK: (-179.6 M)

Total FDI y-o-y: +82.8%

FDI inflow (M USD)

18522781

4557 4106 4608

8317

66175424

0

2000

4000

6000

8000

10000

1999 2000 2001 2002 2003 2004 2005 2006 H1

Source: NBK



Source: NBK

63,1%

6,3%

5,3%3,1%

22,2%

Mining

Real estate

Manuf acturing

Trade

Others

27,1%

55,1%

4,2%

5,7%

7,9%

27,5%

55,7%

6,7%

3,0%

7,1%

2004 2005

2006 H1



FDI inflow by sectors

Gross debt grows due to borrowing by corporates and banks, Kazakh state is net creditor

Source: NBK

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006H1

Gross external debt

Intercompany loans

Government andgovernment-guaranteed debt



Kazakhstan’s foreign debt (bn USD)

0

1000

2000

3000

4000

2000 2001 2002 2003 2004 2005 2006 Oct

*With intra-corporate debt

Gross foreign debt per capita (USD)



Reserves of the National Fund grow by 50% in 2006 Jan- Oct

Return on NF’s assets falls dramatically from 7.6% in 2004 to 4% in 2005

Sources of NF: surplus tax revenue of selected companies, transfers from state budget, income on NF assets

Gross international reserves (end of period), M USD

5439,1

92777066

14188

12087

8015

36665131

02000400060008000

10000120001400016000

2004 Jan 2004 Dec 2005 Dec 2006 Oct

Gross IR

Assets of the NOF

Source: NBK



Liabilities include FDI and borrowing

KZ foreign expansion starts:

- banks

- energy sector (purchase of Tbilgas in GE)

International investment position (USD bn)

-70-60-50-40-30-20-10

01020304050

1998

1999

2000

2001

2002

2003

2004

2005

2006

H1

Assets

Liabilities

Net Position

Source: NBK



2006-2008 government program2006-2008 government program

• Approved by KZ parliament on 15 February 2006Approved by KZ parliament on 15 February 2006• Industrial production +5% p.a.Industrial production +5% p.a.• GDP growth +8.5% p.a.GDP growth +8.5% p.a.• Capital investment +14-15% pa.Capital investment +14-15% pa.• GDP to be doubled by 2008 companed to 2000GDP to be doubled by 2008 companed to 2000• Inflation at 5-7.3% p.a.Inflation at 5-7.3% p.a.

Key areas of developmentKey areas of development

• Aerospace industry – Baikonur, Baiterek complexAerospace industry – Baikonur, Baiterek complex• Telecoms, involving foreign companiesTelecoms, involving foreign companies• Energy sector modernisation, energy conservationEnergy sector modernisation, energy conservation• Ago-industrial complexAgo-industrial complex• Transport/transit – rail, power lines, transport corridorsTransport/transit – rail, power lines, transport corridors



kazakhstan economic boom continues in a favourable external environment 15th bacee country and bank...

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