Kazakhstan’s FDI levels took a hit during and after the global financial crisis, but figures suggest investor confidence and interest are beginning to return. Prior to the crisis, the country’s FDI levels and GDP grew rapidly, but all of that changed in 2008. Some of its banks needed bailing out and new regulations were put into place in the hopes of avoiding the same mistakes being repeated in future.
The country has learnt its lesson and is now proceeding more cautiously, but it will soon roll out a vast privatisation programme. Details on how it will unfold are being kept secret, but specifics should emerge in the next few months. The programme is part of a wider effort to diversify the Kazakh economy away from its dominant oil and gas sector.
Timur Kulibayev, chairman of the country’s $80bn sovereign wealth fund Samruk-Kazyna and son-in-law of the country’s president Nursultan Nazarbayev, will be intimately involved in the process. The fund itself owns majority stakes in a large portion of the country’s companies, meaning it effectively owns a big part of Kazakhstan’s economy. In a few months, the fund will begin to launch initial public offerings (IPOs) on several of these companies.
IPO for the people
While Mr Kulibayev toes the party line on how the programme will unfold, and defers all decisions to President Nazarbayev, he has offered a few clues. Speaking exclusively to fDiMagazine in his Astana office, he says: “Our country’s economy faces huge challenges. This process will help improve corporate governance, and the value and efficiency of our economy. It will also assist in the development of other sectors around the country.”
The first stage of the IPOs, he says, will be rolled out to local pension funds and investors. As such, they have been referred to as 'people’s IPOs' and the aim is to achieve broader shareholding of domestic companies. At the start they will be off-limits to foreign investors and he would not be drawn on whether or not this restriction will change. It is highly likely that equity from these newly listed companies will eventually be available to foreigners, but he reiterates this is a decision that will be made by the government.
The number of companies that will be involved is unknown but is thought to be more than 100. The most obvious contenders would be the larger and more established domestic oil and energy firms, but the effort to diversify the economy means that technically any company could be in play.
The country’s recently appointed minister of economic development and trade, Kairat Kelimbetov, who had previously headed up Samruk-Kazyna, will also have a role in the diversification of Kazakhstan's economy. He believes that by far the biggest challenge the country’s economy faces is an over-reliance on the oil and gas sector.
He sees Kazakhstan as simply too vulnerable to fluctuations in the oil price. During his term he says his main priority will be to attract foreign investment and diversify the country's economy towards other sectors where he sees potential and strategic advantages. These include agriculture, transportation, tourism, chemicals and mining. He adds that over the past 10 years, Kazakhstan has managed to bring in $120bn-worth of FDI and he would like to see a similar level come into the country over the next 10 years, but this time across more sectors.
Most of the foreign investment Kazakhstan will attract will likely come from the usual suspects. Data from greenfield investment monitor fDiMarkets shows that the biggest investors into the country have been Russia, the United Arab Emirates and the US, with the largest corporate investors being Russia’s Lukoil and Silovye Machiny and Germany’s Funke Kunststoffe. Mr Kelimbetov says there has been growing interest from Middle Eastern and Asian countries, particularly in the agriculture sector. There is also an advantage, he says, to the country’s strategic positioning. With its access to Russia, China and Europe, he believes there are opportunities for it to become a transport and logistics hub.
He says: “We are well known as a producer of oil, but this has caused problems for countries in the past. There are stories of successful countries such as Norway and Malaysia [that] have managed their reserves well, but many others have had huge problems. That’s why the president of Kazakhstan, from the beginning, has paid huge attention to having a sound macroeconomic policy.”
Mr Kelimbetov adds: “We are blessed with mining and uranium and are the biggest producer of uranium in the world. So the diversification is the main problem because we have to create new jobs for the growing population, and the energy sector does not always create many jobs.”
The country has certainly come a long way since its experiences with double-digit inflation just 10 years ago. Its economy should return to solid growth, after expanding by only 1.2% in 2009. Figures from fDiMarkets also show investor confidence is returning, after project numbers fell sharply in 2009. In 2010, project numbers were up by nearly 20% and figures to date in 2011 look set to outpace 2010. The same is true in terms of job creation and capital expenditure of these investments.
This all implies the investment climate could be returning to normal, but perhaps this will be met with more modest exuberance than that experienced prior to 2008. Much will depend on the ability of Kazakhstan’s government to wean itself off its reliance on oil. Then there is the matter of who will succeed President Nazarbayev. It is not the kind of country where people like to make it publicly known that they would like his job and, unsurprisingly, few officials appreciated being asked about their political future. But with Mr Nazarbayev now 70 years of age, it is a question many investors are asking.