For at least the past five years now, Central Asian Nation of Kazakhstan was seen as the best of the Commodities-rich Nations on the Chinese Silk Road, with new investments galore.
If you invested money in any central Asian nation, Kazakhstan was an overweight by all measures. Now, a global pandemic may be threatening the country’s achievements.
The oil and gas market faces a global glut like nothing seen before. China is coping with life post-pandemic. This year, it’s put the One Belt One Road initiative, of which Kazakhstan was a major player, on the backburner. Worse yet, business travellers, from Europe or China, likely gave the Kazakhs the coronavirus. The country now has around 4,000 known cases, with 25 deaths. It’s not a lot, but considering other countries started off with low numbers, Kazakhstan is bracing for the worst.
The country adopted the same global quarantine measures in March, becoming more restrictive in April. So far, westerners in the country say that anti-COVID policies are working.
Still, the government is telling foreign nationals from the U.S. and Europe who want to leave that Air Astana will take them to Frankfurt on May 11. That seems like expat exit day in Kazakhstan. International flights to Almaty and Nursultan, the two biggest cities have been suspended.
The Oil Crisis
The Government of Kazakhstan is dealing with an unprecedented drop in oil prices. On April 13, the Ministry of Energy announced that Kazakhstan would reduce oil production by 390,000 barrels per day for a period of two months under the OPEC+ agreement. Brent futures at seen reaching $30 barrel only in October.
The Kazakh oil and gas industry was already in trouble. Kazakhstan’s oil production struggled last year due to well maintenance. Production costs in Kazakhstan are among the highest in the region, with some fields break-evens at more than $30 per barrel.
The country is a key oil exporter in Central Asia.
Kazakhstan exporters been forced to reduce shipments of oil to China, where demand fell in the first quarter of the year due to the pandemic.
So now Kazakhstan is bracing for a dip in its GDP just like everyone else, and higher unemployment, and a weaker currency.
Around 4 million residents have already received the first government relief check of 42,500 tenge ($95), a small contribution for the survival of many households across the country.
The government says it will continue to “go out of their way” to support the population, but the prospective job losses in the energy sector will have a long-term effect on the country’s economy, The Diplomat magazine reported on April 22.
The government has provided over $8 billion stimulus package and is ready to provide more.
The Bright Spot
Which brings Kazakhstan to one of its bright spot: the Astana International Finance Center (AIFC). Compared to the Epcot Center for its similar architectural design, the Center was the brainchild of the former president Nursultan Nazarbayev and is seen at home and abroad as the symbol of modernity in the country; an embrace of global capital markets. Today, however, the government, while still saying it is committed to future public offerings of bonds and shares, is likely to be paying more attention to public health before issuing the bonds and conducting the IPOs it has promised.
People who work with the AIFC but could not be quoted on the record said they are working on a “massive influx of additional financing” from the World Bank, Asia Development Bank, European Bank for Reconstruction and Development (EBRD) already a huge player there and the International Monetary Fund. The AIFC believes it can be a financial hub to help rebuild Central Asia, as China is on hold while the coronavirus takes a run through the region.
In April, AIFC turned to the EBRD to help support a new Green Financial Center, an attempt to tap into their biggest buyers in Europe who are hopping on the ESG investing bandwagon.
They partnered with the Mongolian Sustainable Finance Association on April 15 in the area of sustainable and green finance, expecting the market to develop in Kazakhstan.
“It sounds good. It sounds like the right place to be, marketing wise. But KZ as hot spot for ESG….that needs a lot of marketing,” thinks Arent Thijsen, a long-time frontier market investor who owned Kazakhstan securities. He’s sold out of them to create a Long/Short Sustainable Equity fund at Blauwtulp Wealth Management in Rotterdam. “If they do it, it will be better for the regions,” he says.
There is no one issuing green bonds in Central Asia.
AIFC leadership thinks the green bond market is something to look forward to. “Kazakhstan can become a part of this market,” says AIFC Governor Kairat Kelimbetov, who has become the voice of the market for the country. He’s the one they put on CNBC. Kelimbetov is the one who goes to Davos.
He told reporters at a recent press conference that they were looking for an interesting investment project to give it the green light. “It may be a city project like clean transport, drainage of swamp lakes, smart lighting of the city, or natural gas for Astana,” he said.
Kazakhstan has known for years that oil and gas was its Achilles heel.
China’s Silk Road project was a special treat, and it helped put the country on the map and in global headlines, too. The new AIFC was designed to bring capital markets to the country, and help it move away from being a Russia-style oil and gas economy.
Going green is a way to ween themselves of all that, and keep the AIFC in the finance game.
Kazakhstan is part of the UN Framework Convention on Climate Change, Kyoto Protocol, and Paris Agreement. It is a member of the UN Green Bridge Partnership Program and became the first country in Central Asia to even talk about sustainable energy. In 2007, they introduced a new environmental law, and again in 2013 they made a commitment use renewable energy in its power grid, going from around 2% currently to 30% in 2030 and 50% in 2050.
By this token, the Kazakh’s version of a Green New Deal gets financed by institutions inside the AIFC, bonds, loans, IPOs, legal contracts, the works. It’s also a way to develop post-pandemic.
“This will require large amounts of investments,” says Alexander Van de Putte, chief strategy officer of the AIFC.
The Pandemic Crisis
Assuming the pandemic hits Kazakhstan like it has elsewhere, with government mandated quarantines hurting local business, and assuming oil prices stay below the budget balance point, Kazakhstan needs the AIFC project to be more than a low volume securities exchange.
It’s going to have to be an economic development center that picks up where China’s Silk Road and weak oil has left off.
On April 2, the government clarified their new budget framework. The projected dollar exchange rate will be 440 to the dollar, it’s not a free floating currency.
Core inflation will go up between 9% and 11%. The government will borrow 2.7 trillion tenge from the National Fund. On April 8, President Kassym-Jomart Tokayev signed a modified 2020 budget, providing a massive rescue package for an economy on pause because of the pandemic.
According to the deputy chair of Kazakhstan’s National Bank, Aliya Moldabekova, the Bank’s reserves of around $57.5 billion was enough to help Kazakh citizens and businesses in quarantine.
Kazakh Energy Minister Nurlan Nogaev said on March 7, “We have budgeted the oil price at $50-$55 per barrel. If it falls to $40 and below, the government has a plan to optimise the costs and we are already working on it.”
London-based investment research firm Tellimer says countries that are quick to respond with backstopping economic policies, and have low overheads, will be able to cope best with the loss of external demand.
“Kazakhstan appears better prepared to do this than the rest of the emerging world, with Southeast Asia appearing notably vulnerable,” says Paul Domjan, a senior analyst for Tellimer Research.
The stress test for the Belt & Road Countries is unprecedented, but so it is for all of us.