Kazakhstan has been hit hard by the international credit crisis, spreading concern among banks and other potential investors. Philip De Leon speaks to Erlan Idrissov, Kazakhstan’s ambassador to the US, who believes the crisis will serve as a wake-up call for the state’s banking market.
GTR: The global credit crunch that is affecting Kazakhstan may result in slower economic growth in 2008. Standard & Poor’s recently downgraded Kazakhstan’s credit rating from stable to negative. What measures, if any, does the government intend to take to stimulate the economy and keep inflation under control?
EI: First, let me say that one kind of positive aspect of this global credit crisis is that according to the IMF, Kazakhstan was the only Central Asian economy to be hit by it. This means that Kazakhstan is firmly a part of the global economy: what happens globally affects us.
The other effect is that it served as a wake-up call for banks that over-relied on foreign borrowing and had become too complacent. They were capitalising on high commodity prices, the good rating of Kazakhstan and got used to an easy life. Banks will have to restructure their strategies and practices and seek out other sources of financing.
The government is pleased this wake-up call came as it had been telling the banks, that wouldn’t listen, that they over-relied on foreign borrowings; that was the opinion of the World Bank and the IMF as well. This served as a good lesson as it forces the banks to be more responsible as economic players and it will help them become healthier and stronger.
Regarding Standard & Poor’s lowering of Kazakhstan’s prognosis rating on its long-term sovereign credit ratings from ‘stable’ to ‘negative’. It is in my point of view a temporary correction.
As for measures taken, the government and the National Bank of Kazakhstan came up in January with a very strong statement that they would focus on containing inflation below 10% and that they will use a whole set of instruments to make sure this goal is met. The government recognised the economic growth rate would slow down to about 5-7% from a high of 8-10%. We believe it is a good effect that will prevent the economy from overheating.
Some of the other measures taken are the following:
• A rigorous plan to coordinate the efforts of all government agencies, regulators, and the banking system to alleviate pressures arising from tightened funding conditions in global capital markets.
• Support to the banking system by engaging in open market operations, providing loans to individual institutions and in certain cases, currency swaps.
• The government will also encourage banks to explore alternative sources of finance, such as equity listings and sale of convertible bonds, and to explore the possibility of securitisation of their credit portfolios.
GTR: Kazakhstan’s banking system has long been considered as the most solid of the CIS. How are Kazakh banks weathering the present liquidity crisis?
EI: The present situation and the liquidity shortage will lead to needed corrections of the banking system. It has forced the banks to change their development strategy, to cut lending, to use existing liquidity reserves, to refinance of debts, and consider possible merger opportunities.
The government is very wary of the interests of other economic players like construction companies, even more so as some of their projects were funded with the start-up capital of individual stakeholders who are our middle class people. Therefore, the government has set up a US$4bn package to help commercial banks to continue its lending to small and medium companies. The government is weary of the social cost of this crunch and has taken measures to alleviate it. Of course, there will be a cost and it will serve as a reminder that we all live in a global economy and that we should work and act accordingly.
GTR: The need for and the price of agro-commodities are going up. Does Kazakhstan intend to increase its production, and if yes, how will it address the severe water shortage affecting Central Asia?
Two aspects to this issue: Kazakhstan was a net food exporter in Soviet days and a major producer of grains, meat and poultry. We are a strong agricultural country but it was the hardest sector to reform and initially the cost born by the players was the highest.
It was the sector where the most inappropriate practices of Soviet days were entrenched so it was hard to transform. We had to change mentalities and habits and we have done that. The turning point was the law on private ownership of land, which created a lot of debate.
Now agriculture is on the rise. We are the top fifth or sixth exporter of grain. President Nazarbayev said at a recent conference in Sharm-El-Sheik that he will use every opportunity to raise agricultural production and that foreign investors in that sector would be welcomed.
Increasing production would contribute to solve the food shortage at a global scale. One aspect to increase production is to attract foreign investment and there is a legal framework to facilitate partnerships with foreign partners to develop production. In fact we have the potential to develop organic production for oil seeds and meat but to do so we need processing and packaging standards and managerial skills of the west, such as Europe. That would be a fantastic marriage and that could result in a sizeable growth in food products that could supply international markets.
We already have opened new markets for our wheat such as to China, Iran, Egypt, Italy, and Scandinavian markets. Everything is produced in Kazakhstan, except tropical and subtropical products like banana and oranges. Also remember that apples are from Kazakhstan.
About 47% of our water originates in Kazakhstan but the rest is downstream water so it is a big issue that we address it in three ways:
• With projects to enhance the use of water bodies. For instance we work with the World Bank for the rehabilitation of the Aral Sea and we work on clean-up projects.
• By introducing rational use of water, as we understand water is not an ever-lasting product. For instance, we are implementing the installation of water meters.
• By negotiating mutually beneficial deals with China, Russia and Central Asian countries from which the water comes from.
Central Asian countries are particularly important, as they all need water. For instance most water originates in Kyrgyzstan and Tajikistan and a lot comes through Uzbekistan. We are ready to invest in joint water projects with them. We already signed a trans-boundary water agreement with China several years ago, which is the first of its kind and we have a permanent dialogue on the topic.
GTR: Russia recently adopted a strategic sectors law that may impact foreign investment. Does Kazakhstan intend to do the same and what incentives exist to attract foreign investment?
EI: Any country is free to do whatever it deems appropriate for itself but for us foreign investment is a very important element of our growth. Per capita, we attract more FDI than in the entire former eastern block.
Since 1994 we have attracted over US$70bn with US$10.6bn in 2006, and US$17.5bn in 2007 alone. This is a huge increase. Private sector investments are an important tool for our own vision for growth, so we continue to improve the investment climate.
Oil and gas sector is not the sector where we try to attract investors, as there is already a long queue there so we try to attract investments in non-extractive industries.
We do have strategic sectors like oil and gas, but I will remind you that 80% of assets in the oil and gas sector belong to foreign companies. This tells you how open our economy is. But the government is there to make sure the economic interests of the nation are seriously observed. For example, for the new projects in the Caspian Sea, we make sure that the deals are done on a 50-50 basis regarding national/foreign involvement. We want to develop a local capacity.
Other sectors we consider as strategic are telecommunications, transport, financial services but we are quite liberal and we will keep liberalising those sectors within the framework of our WTO accession. This will strengthen the competitiveness of these sectors.
Some of the incentives we have are through our investment law that creates a level playing field for both domestic and foreign investors. We eliminated the double taxation of dividends and are working on a new tax code meeting WTO standards. We created a unique institutional mechanism which is the Foreign Investor Council chaired by the President of Kazakhstan. It comprises the largest investors in the Kazakh economy and allows investors to have a direct dialogue with senior government officials. We also have free economic zones and are working towards reducing the numbers of licenses needed to operate.
In a few words I would say the non-extractive sectors.
GTR: Kazakh companies are on the watch list of investors, exporters, mutual funds managers and exchange traded funds. Beyond oil & gas, which companies or sectors would you recommend considering and why?
In 2003 Kazakhstan adopted the Innovative Industrial Development Strategy for 2003-2015. Within this framework the government is set to actively work to attract investments into non-extractive sectors of the economy.
The government has identified seven economic clusters: tourism, transport logistics, oil and gas machine building, construction materials, food processing, textiles and metallurgy. Within these clusters investment activities in the following sectors are subject to a privileged treatment: food processing, machinery building, metallurgy, textiles, production of IT goods and related services, chemical industry, leather industry, supply of construction, wood processing – furniture, hotel services, agriculture, automotive industry, tourism and transportation services. Investments into these privileged sectors are subject to corporate income, property, and customs and duties exemptions.
Other areas where we welcome investments are the high-tech sector, biotechnologies and the space sector as we have our own space launching capacity. For instance, we launched in 2006 a telecommunications satellite, which is a strong signal of our capabilities. So any value-added activities such as in the service sector are sectors where foreign investment would be most welcome.
We help them in two ways: we provide government assistance such as loans but our major engagement is through our private sector. We are a major investor in Kyrgyzstan and we are now the number one investor in Georgia. Our private sector invested in a hotel chain, gas distribution network and power distribution.
GTR: Kazakhstan sees itself as a regional leader and is aiming at joining the community of the world’s 50 most competitive nations. In that process, how can Kazakhstan help poorer Central Asian countries such as Kyrgyzstan and Tajikistan and the not so remote Afghanistan?
The Kazakh banking sector has a significant presence in Kyrgyzstan and the mining sector in Tajikistan is of great interest to Kazakh companies, so the private sector is the driving force behind improving the situation in those countries. For example in the banking sector, the good banking practices of Kazakh banks are now implemented in Kyrgyzstan.
For Afghanistan, which is a special case, we are the only country of the former Soviet Union to have a special programme for Afghanistan. Last October, we adopted a US$3mn action plan to assist Afghanistan for 2007-08: US$0.5mn was allocated to humanitarian aid to restore the food, corn and agricultural seed supply; the rest was used to build a school, a hospital and a road. This is a very practical and specific contribution.
We have provided scholarships for 100 Afghan students to study topic such as engineering and geology in our universities. We also provided training for the police and internal security services.
But there is also a second part to this plan, which is a private sector part as the private sector is very eager to work in Afghanistan by participating in tenders, building power stations and hospitals, among other infrastructure projects. The caveat remains that security issues be addressed but our private sector is more adventurous and familiar with the environment. So I think the public and private sector efforts in Afghanistan are quite visible and I have the highest respect for these efforts.
GTR: Kazakhstan is working on its WTO accession. How do you think WTO accession will affect Kazakhstan?
The answer is that WTO accession is part of our long-term vision. We are working for our future, as we want to raise our competitiveness and getting market access for all our goods.
Joining the WTO will force us to raise business and technical standards up to WTO standards. This will impact all sectors and it is a long-term gain for Kazakhstan. Thirdly, education and human resources is very important to us, so by joining WTO we are investing in our human potential.
Today, Kazakhstan’s trade stands at 50% with WTO countries so it will enhance our access to WTO markets. Let’s not forget that we are a landlocked country and that tariffs have a huge impact on Kazakhstan, so we need to work on better tariffs.
We could sit calmly on our commodities goods now without rushing into WTO but our drive towards WTO accession is a reflection of how serious we are about the diversification of our economy and bringing it up to world standards.
GTR: How would you finish the sentence “Kazakhstan is…”?
Second, Kazakhstan is a modern, fast growing, forward looking, democracy building nation and a very responsible and active member of the family of nations.
Kazakhstan is a fascinating place in terms of nature and many discoveries are to be made by explorers in Kazakhstan.
Erlan Idrissov has been ambassador of the Republic of Kazakhstan to the US since July 2007. He served as ambassador to the UK from 2002 until 2007 and as Minister of Foreign Affairs from 1999 to 2002.
First, Kazakhstan is the heart of Eurasia. This carries a lot of messages. We are an ancient culture that was always at the crossroads of different outlooks, habits, cultures, ethics, standards and we are flexible and tolerant. We are a place where all of this meets and melts into new quality and we are a bridge to Asia, the Pacific, China, Europe and other parts of the world. We are at the centre of a huge mass of land that has a great peace, security, trade and economic potential so the heart of Eurasia is not just a geographic term, it has a very serious message. WTO accession is a very well thought-through thing for Kazakhstan. We do not have any market access problems with exported goods such as oil and gas so some of our neighbours may ask: why is Kazakhstan rushing into WTO?