Kazakhstan Receives A Vote of Confidence
From Foreign Investors

Recently, Moody's Investors Service raised Kazakhstan's bond rating two notches up.  This was in recognition of the vast improvement in the country's macroeconomic outlook, which has come in the wake of higher oil prices, higher economic growth rates, fiscal and external accounts stabilization and the prospect rapid oil output increases.

The thumbs up from one of the premier rating agencies also reflects some measures the government has taken.  After the Russian crisis, the government was forced to devalue the tenge and attempted to stanch capital flight through administrative means.  As oil prices rose and equally as non-oil exports recovered, the government cautiously removed these restrictions.  As importantly, higher revenues to the budget were not translated into commensurately higher spending.  A substantial portion of the revenues was saved in the Future Generations Fund.  Both measures have improved the fiscal and balance of payments outlook for the country:  slower growth in expenditures than revenues has not burdened the country with higher carry costs of government; the reserve fund will allow the government to finance future deficits if and when oil prices fall.

The government also used regulatory changes to capitalize on higher oil prices and export revenues to re-liquify the banking system.  This in turn led to more domestic confidence and bank deposits have risen.  In the wake of this positive move, the government was able to ease monetary policy (lower interest rates) without increases in inflation.  Now the government is attempting to further increase domestic liquidity and the funds that can be invested at home by providing an amnesty on funds kept abroad.  Given the stability of the banking system, which to a certain extent was also enhanced by bank mergers, stricter capital adequacy requirements, better bank supervision, this should add a another boost to domestic investment spending.

The government's other reform efforts have also been notable.  Principal among them was the establishment of the best pension system in the region.  However, slowing privatization and some confusion among foreign investors about government regulations have continued to be a drag on growth and investment.  There is also concern among foreign investors that Kazakhstan will put too much emphasis on its oil and gas sector and neglect other productive areas like agriculture.  However, all in all, it is noted that the authorities are aware of these issues and as oil flow grows will turn their attention to privatization, encouraging non-oil foreign direct investment and employment generation. 

Fareed Mohamedi
Chief Economist
Petroleum Finance Company
Washington, DC