Transcript Update on Russia-Ukraine crisis and impact on Kazakhstan

Kazakhstan
Business outlook 2014-18
Quarterly update – January 2015
by Dr Daniel Thorniley
Contents
•
•
•
•
•
•
•
•
Executive summary
Update on Russia-Ukraine crisis and impact on Kazakhstan
Corporate sales and profits trends
Strategic business issues
Economic outlook
Inflation and interest rate outlook
Currency outlook
Forecast table
Executive summary (1)
•
Compared with other CIS and CEE markets Kazakhstan is performing very well and ranks
No 1 out of 23 markets for the “rate of sales growth” and ranks No 2 for the same
criterion with profits
•
It also ranks No 1 in many different business sectors for sales growth
•
But executives on the ground are perhaps a little less enthusiastic as the market is slowing
along with the economy and there is growing concern that the tenge may have to be
devalued again due to the collapsing Russian rouble
•
Once the devaluation of February 2014 had run through the system, the economic
recovery did not turn out to be so sustainable
•
And, as with all other markets, regional and global trends are not doing business any
favors: Russia and Ukraine are in recession, the Eurozone is sluggish and China continues
its managed GDP slowdown which require fewer raw materials
•
The global oil price is down more than 50% and copper prices and other commodities
prices are low or worse
•
But we think the government will seek to prevent deep slump by kick-starting the
economy through fiscal policy and employing various reserve funds
Executive summary (2)
•
•
•
•
•
•
•
To this end President Nazarbayev ordered at the and of last year that the National Oil
Fund release a further $3bn to be spent on infrastructure projects
Kazakhstan is doing a better job of trying to stimulate its economy than Russia has done
over the last 20 months
Falling oil prices meant that industrial output slumped to zero last year and will
probably flutter about 1.0% this year before rallying in subsequent years as the oil price
stabilises or rallies a little
But the non-oil sector is still somewhat strong, backed by an increase in government
spending on wages as well as investments – overall fixed investment growth is almost
6% and should run steady at this level as government pump-primes the economy
The consumer trade, transport, logistics, communications and financial services sectors
are all growing strongly (5-9% range) – and retail sales are maintaining their recent
annual averages of growth at 11-12%
But the devaluation of last February (2014) hurt confidence and consumption for
several months
And the malaise from the Russian rouble depreciation hangs over the Kazakh economy:
citizens worry about another possible devaluation and the government wonders how
slow GDP will become
Executive summary (2)
•
•
•
•
•
•
•
•
But still, overall Kazakhstan remains the top or second-top CEE market for sales growth
and western business confidence and in comparison with other markets is one of the
very strongest
Despite another 10% hike to public sector wages, with inflation still over 7% real wages
are likely to grow only about 2.5% this year
Inflation running at about 7% average this year is slightly above the average of the last
two years
But presumably lower energy prices and costs will ensure that inflation does not climb
much further
The National Bank is fending off claims it may embark on another tenge devaluation -- of
course if it happened this could cause another inflationary spike
As the Russian rouble does not recover and with the Belarus rouble collapsing in recent
days, there will be more practical and psychological pressures on the tenge
The tenge remains at around its devaluation rate to the dollar but has regained about
half its level to the Euro and effectively all of its value against the Russian rouble
But unlike before the last devaluation, currency reserves have actually been rising and
having just released a $2.5bn Eurobond the government is likely to be willing to allow
some further strengthening to prevent a rise in foreign debt – however in case of a very
sharp drop in the rouble, another devaluation cannot be ruled out
Update to Russia-Ukraine crisis and impact on
Kazakhstan (1)
•
There is little direct impact on Kazakhstan from the Ukraine/Russia crisis but the indirect
linkages are many: loss of confidence, weaker regional growth, less local or foreign direct
investment
•
The Russia-Ukraine crisis has turned into a messy frozen conflict which will continue to
blight growth in the region and marginally in Kazakhstan until and if it is resolved
•
The conflict will impact growth this year but less so later as the situation normalises and as
Kazakhstan continues to diversify its export and investment partners, forging closer ties
with China, Iran, the EU, etc.
•
Global economic trends such as the sluggish Eurozone, decelerating china and average oil
price will be the big influencers in the next 2-3 years
•
Kazakhstan ought to be become self-sufficient in oil from around 2018 when the Kashagan
oil field should (finally) come on stream
Update to Russia-Ukraine crisis and impact on
Kazakhstan (2)
•
Along with Belarus and Armenia, Kazakhstan is set to join the new Eurasia Economic
Union (the successor to the current Customs Union) in January, but as with the other
partners it has stopped short of agreeing to any further political or institutional ties and
most businesses have already factored in the pros and cons
•
The Eurasian Economic Union is making some western companies in the pharmaceutical
sector for example think of registering products in Kazakhstan so as to get quick access
tot the Russian market
•
To demonstrate it is not “choosing sides” over Ukraine, Kazakhstan also plans to sign a
cooperation agreement with the EU in 2015
Corporate sales and profit trends (1)
From our December 2014 survey (next survey in June 2015)
•
•
•
•
•
•
•
•
With the tenge devaluation, slightly lower domestic growth, regional risk in CIS and
moderate slowdown in the major trading and investment partner, China, it might not be
too surprising to note that executives expect some business softening this year
In fact business perceptions have stabilised a bit since summer 2014 and no company
surveyed is planning negative sales growth in 2015
Some 10% predict flats sales expansion
Almost 50% forecast single-digit sales with a mix between low and high singles
And this leaves a hefty 40% forecasting double-digit sales in 2015
As with all other forecasts made last November/December in other CEE markets, there
is probably a bit of downside risk to the numbers, but Kazakhstan has the least risk
except for any devaluation threat which does concern executives
Profit trends in both 2014 and those planned for 2015 mirror very closely those of sales
Taken all together this places Kazakhstan in No 1 slot head of Turkey and in No 2 slot for
profits behind Turkey
Corporate sales and profit trends (2)
From our December 2014 survey
•
The lead sectors for growth are food and beverages, where all companies expect to
grow this year, and healthcare and pharmaceuticals
•
Consumer product companies have typically done well in Kazakhstan on the back of
ever-increasing wages, but with the February 2014 devaluation, expectations for 2015
became more sober during last year
•
But the devaluation effects have evaporated and for 2015 consumer product firms
expect steady/strong year with just 8% looking for flat sales, 42% forecasting single
digits and a big 66% budgeting for double-digit sales
•
Real wage softening could be one factor that puts these numbers under pressure and of
course once again any 2015 devaluation would sink such estimates
•
But for now the consumer product outlook is reasonably good
Corporate sales and profit trends (3)
From our December 2014 survey
•
•
The IT sector is very mixed depending on sub-sector and customers, but overall the vast
majority of companies expected to see growth last year and in 2015
Industrial B2B companies as usual have the lowest expectations, in-line with regional
trends, but still Kazakhstan sticks out positively here as well: almost 60% of respondents
forecast single digits but 36% are planning for double digits which makes Kazakhstan
the best B2B market in the CEE region and quite significantly so with only Turkey getting
anywhere near these numbers
•
But when it comes to the pharmaceuticals and health sector, Kazakhstan is not in the
top-3 markets and in fact ranks 10th with a wide spread of excepted results for sales in
2015 with companies spread evenly across flat sales and single digits as well as double
digits
•
As is usual in this sector, it depends on product category, government priority
reimbursement lists and OTC/retail trends and usually as governments cut back, retail
sales perform relatively better
•
So in summary, business is steady to good or better but not booming
•
But in comparison with many other markets, then a blessing to have!
Revenue and profit results/forecasts, 2014-15
all sectors, comparison of our June and December 2014 surveys
Revenue and profit forecasts by sector, 2014
From our December 2014 survey
Revenue and profit expectations by sector, 2015
From our December 2014 survey
Strategic business issues (1)
From our June 2014 survey
•
•
•
•
•
•
•
The operating environment is generally good by CIS standards and executives often
speak warmly of operating trends compared to neighbouring countries
Perceptions of corruption are lower than in Ukraine and companies say the amount of
red tape is less burdensome than in Russia
In our latest survey, Kazakhstan is 4th behind Russia, Turkey and Poland among 23
markets in the CEE region in terms of strategic priority (a mid-term priority market for
22% of companies)
Given current economic and political trends, more companies will be turning to
Kazakhstan rather than Ukraine for growth prospects, but Ukraine remains bigger
usually for volume.
But for a growing minority of western companies Kazakhstan is now a larger volume
market than Ukraine
For many companies Kazakhstan will be the biggest market in the CIS behind Russia
Kazakhstan ranks equal 2nd (behind Russia) for companies’ hiring plans, with 14% of
companies raising headcount this year. This number is slightly lower than the one from
last summer which also suggests that the market could be slowing or that companies
have already hired the staff they require for 2015 budgets
Strategic business issues (2)
From our June 2014 survey
•
•
•
•
•
•
Kazakhstan ranks 6th among companies thinking of modifying their distribution and
route to market, with some 17% of companies reviewing this and this is down on
previous scores probably because companies have already implemented the changes
Route to market is crucially important in Kazakhstan which still represents a growing
market and with clients and consumers spread over a large geography
Few companies report a lowering in staff turnover because of course the market
remains hot
The problem of supply and demand for local or expatriate staff is one of the key
challenges cited by investors
Some companies employ young expats who want some exotic excitement early in their
careers but the balance with experience is then hard to find
Few companies (9%) are planning to reduce headcount and this number probably
reflects churn and re-allocation of posts
Strategic business issues (3)
From our June 2014 survey
•
•
•
And as one would expect, few companies (8%) are looking to cut their marketing and
sales activity in this country
A slight sign of strain in the market is the growth in the number of companies reporting
downtrading and whereas this was insignificant in the past, now almost 20% of firms
report this trend
And similarly when issues with receivables were negligible, now 19% report this as an
issue, which still paces Kazakhstan in the bottom half of the table for this indictor in our
Survey
Economic outlook (1) – GDP and growth drivers
•
Kazakhstan’s economy has survived recent global and regional headwinds reasonably
well but continued downward trends in Russia and the weak oil price will ensure slower
GDP growth his year
•
We anticipate 3.9% for 2014 and 4.2% this year after 6.0% growth in 2013
•
We then estimate that growth will trend at 5-6% in subsequent years on a soft/sober oil
outlook i.e. oil price will not jump back to $80-90
•
The economy did survive the February 2014 devaluation after some initial glitches and a
figure of 4% growth in 2014 was “not bad” but other factors apart from the February
2014 devaluation have since set in
•
But the big worry hanging over the economy is the possibility of another devaluation
taking place in the coming weeks given the falling oil price and the stumbling Russia
rouble
•
For example, the Kazakh current account surplus feel to just 1.0% of GDP last year and
this year will probably plummet to -4.0% with some commentators suggesting a figure
of -9%. Whatever the final figure, this will be another strain on the currency outlook
Economic outlook (2) – GDP and growth drivers
•
Business confidence is holding up so far and the indicator has averaged about 10-12 in
the last year with a low point of 4-5 in February 2014. The November figure was 12 but
we think that the turmoil in the Russian rouble in December and current sluggish oil
price will bring confidence down during the first 4-6 months of 2015
•
Though export volumes shot up following the devaluation, in US dollars both exports
and imports are down -5% and -15% respectively though to October 2014
•
Monthly exports averaged $6.5bn to $7.5bn in the last two years and were at the lower
end of this range during June to October 2014. With the depreciated oil price, we see
further cutbacks in export revenues and hence why the current account will dip into
sizeable negative territory as a portion of GDP at about -4.0% this year
•
Supporting growth is the strong trend in fixed investment, which grew 7% in 2013 and
6% last year
Economic outlook (3) – GDP and growth drivers
•
Government spending and infrastructure outlays are among some of the drivers here
but we think the lower oil price will tend against some projects and thus investment
growth will balance out at a slightly lower level of 5.5% this year and then trend up to
7% increase again in 2016-18 on the back of the 2017 Expo and presumably stable if
soft oil prices
•
But foreign investment (aside perhaps from China) is likely to be stymied by the ongoing regional uncertainty at east for the coming year
•
Following the tenge devaluation the government has ramped up its capital spending
programme (see later) and is drawing from its sizeable forex reserves and the oil fund –
which together total $104bn – to support growth
•
Agriculture (about 2.5% of GDP) had turned just negative in the first 11 months of 2014
and this is a key indicator with some 50% of the population still living in rural areas
•
Non-oil sectors remain the key growth drivers though: services, which make up just
over half of GDP, expanded 5% in the first 11months of 2014 year, driven by 9% growth
in retail and wholesale trade, 7% growth in transport and logistics, a 8% rise in
communications and 8% growth in financial services. Construction (about 5% of GDP)
was also up 4.0% to November
Economic outlook (4) – GDP and growth drivers
•
Wages were rising 8-10% in the fist 11 months entailing real wage growth of about 2% last
year and with steady inflation or more likely lower prices in subsequent years, we expect
real wages to stabilise at around 2% annual growth
•
Industry was virtually flat in 2014 and we see only a 1.0% increase this year with downside
risks. The figure for industry is being held back by some oil maintenance works but these
should finish in early-mid 2015 and this change will be one factor keeping industrial
output in positive territory
•
But it will be 2018 at the earliest before the massive Kashagan oil field comes on stream
(which should double output but has been beset by delays and massive cost overruns) –
until then earnings will mainly fluctuate in-line with oil prices
•
We now think growth finished at 3.9% in 2014 and trended lower at the end of the year
mainly due to lower oil prices
•
Presuming some oil and FX stabilisation in subsequent years, but against a back-drop of a
soft oil price, we see growth to picking up a little in 2015 and 2016 to 5.5% to 6.2% range
and government pump-priming will be a major supporting factor
•
And the planned 2017 Expo could be another spur to growth
Economic outlook (5) – government spending
•
•
•
•
•
•
•
Government spending will continue to be robust and rose about 2.6% last year and will
tick up by 3.2% this year
After the devaluation of February 2014, the government went into more stimulus mode
to combat falling growth and this will have to remain the trend as oil prices continue to
slump
As the government spends more and revenues stay flat or more likely decline, then the
budget deficit will widen this year: after touching at least -3% last year, this will rise
aging to minus -3.3% this year and stay at -2.8% in 2016
The risks are on the downside because, as with other oil producers, the 2014 budget
was set with an oil price well above the current $48 per barrel
However much of the spending will be off-budget, including investments via loans
financed by the $77bn national oil fund, otherwise our estimates for government
spending and budgeted deficits would have been larger
In a sign that investors are relaxed about the growing deficit, Kazakhstan successfully
launched a $2.5bn Eurobond in October last year – its first since the 2009 crisis -- which
was wildly oversubscribed
2015’s budget foresees a real cut to spending but in practice spending, especially in
capital projects, will keep growing and the budget will have to be revised and/or
ignored
Economic outlook (6) – trade and investment outlook
•
•
•
•
•
•
•
Large infrastructure investment projects should benefit from the increase in
government spending, with several major transport and logistics projects – including a
new airport in Almaty – currently being pushed forward
Since 2010 the government has spent $10bn from the national oil fund (NFRK) on 27
economic diversification projects and has a pipeline of $81bn worth of projects (100 in
total) across areas such as healthcare, education, high-tech, telecoms, manufacturing,
infrastructure, utilities, etc.
Targets to increase the total of the National Oil Fund will now fall by the wayside due to
low oil prices
But the plans to spend more from the Fund will continue: in November last year the
President mandated that $5.4bn be released from the Fund in the form of long-term
credits to be utilised mostly in 2015 and a further $9bn was ear-marked for large-scale
infrastructure projects in 2015-17.
Chinese investment will also keep pouring in – it signed $30bn worth of investments
last September
China is now estimated to own half of Kazakhstan’s oil assets
The government is also trying to increase the competitiveness of its state-owned
enterprises (SOEs) and Samruk Kazyna, the state holding company which manages
$100bn of SOEs, is planning to spin off certain assets and using the funds to invest in
new sectors
Economic outlook (7) – consumer spending
•
•
•
•
•
•
•
•
Consumer spending has remained robust aided by wage hikes and growing lending (in
turn supported by low interest rates)
Public sector wages were hiked 10% last year in nominal terms and we expect we could
see further increases in 2015 ahead of presidential elections
But we also expect overall nominal wages to slow to single digits from recent doubledigits
This will mean that real wages continue to increase at about 2.0% in 2015 and also in
2016. This is by no means a bad number but lower than the 7% real wage increase in
2014
But low unemployment, credit emission and consumers eating into savings have all
combined in keeping retail spending at a very healthy 12% average in 2014 matching
similar numbers in 2013 and 2012
With stubborn inflation about 7% and confidence general weakening against the
backdrop of a low oil price and a recessionary Russia, we expect retail sales to decelerate
to 7-8% this year and in subsequent years with downside risk
Household spending generally should slow down to 5-6% growth in 2014-2017 down
from 9-11% in 2012-13
Consumer credit was surging at 27% end-2013 but, as with other markets, we expect
some moderation this year to 8-12% (still very strong by regional standards)
Inflation and interest rate outlook
•
•
•
•
•
•
•
The February 2014 devaluation stoked inflation from a low of 4.4% in January 2014 to
an average of 6.8% to 7.6% through the rest of the year and inflation in November was
7.4%
With the slow start to inflation last year, the annual average came out about 6.8%
There are also signs that the inflationary trend at the end of last year was slowing at the
margins and when we add falling oil prices to the equation (Kazakhstan still imports
about one third of fuel needs, mainly from Russia), then we see prices on a downward
curve over the next 18 months to about 5.2% average inflation in 2016 for example
The only big risk of course stems from any potential devaluation in 2015 and the odds
would seem to be about 50-50 on this, although the Bank and the government would
be hugely reluctant to go this route for confidence reason and with future elections
beckoning
Despite negative real interest rates, the National Bank has kept the refinancing rate at
5.5% for over a year now in order to boost and support flagging growth
The Bank will aim to keep rates at this level as long as inflation stays below its upper
limit of 8%
However, as currency pressures remain, then it may be forced to increase the repo rate
in the coming weeks/months though rates will remain low in real terms
Currency outlook
•
Since summer 2014 the “rumours” have been about another tenge devaluation of 815% or perhaps more following the 19% devaluation of February 2104
•
However National Bank governor Kairat Kelimbetov vehemently denied the prospect,
pointing to ample reserves of $28bn and $76bn in the oil fund
•
Since February last year the tenge has fluctuated versus the dollar in a defined range
of 180 to 185 usually averaging 182 and creeping down to 183/184 at the end of 2014
•
Meanwhile versus the weakening Euro the tenge has climbed to 182 at the end of
2014 (matching of course the 1.18 FX rate between dollar and Euro)
•
Falling reserves and a loss of competitiveness against the Russian rouble preceded
February’s devaluation, but while reserves are up this time, the much weaker rouble,
softer oil prices and weaker Euro could provide further grounds for a devaluation
•
The continuing collapse of the oil price and the Russian rouble weigh down heavily on
expectations. Until December 2014 a devaluation seemed “only” a 30% chance but
today the prospects must be at least 50% and rising
Kazakhstan - economic outlook: statistics
GDP
Fixed investment
Industrial output
Household spending
Government spending
Real wages
Retail sales (year-end)
Consumer prices (average)
Budget balance (% GDP)
Current account (% GDP)
Tenge/euro (average)*
Tenge/dollar (average)*
Unemployment (%)
2012
5.0
3.7
0.5
11.0
13.2
6.9
14.1
5.1
-3.0
4.6
192
149
5.4
2013
6.0
7.0
2.3
9.0
2.0
1.6
14.2
5.8
-2.5
0.0
197
152
5.2
2014
3.9
6.0
-0.1
6.2
2.6
2.0
12.0
6.8
-3.0
1.2
230
182
5.0
2015
4.3
5.5
1.0
5.5
3.6
2.2
8.0
6.5
-3.3
-4.0
214
185
5.0
2016
5.5
6.8
3.0
5.4
3.2
2.6
7.5
5.5
-2.8
-3.7
210
185
4.8
2017
6.3
7.0
4.5
5.5
2.7
3.0
8.0
5.2
-2.5
-3.3
204
182
4.7
2018
6.4
6.8
5.1
6.0
2.5
3.3
8.0
5.0
-2.3
-2.0
200
180
4.7
Note: Real annual % change unless stated
* This is our base-case; a further tenge devaluation is possible in 2014-15 but only in case of a further sharp fall in the
rouble-dollar exchange rate – see previous slide
© 2015 CEEMEA Business Group*
*a joint venture between
DT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,
Company registration: FN 331137t
and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, Austria
Company registration: FN 331082k
Source: DT-Global Business Consulting GmbH and CEEMEA Business Group research
Basic data sources come from central banks, own intelligence network, CEEMEA Business Group
corporate survey, governments and other public sources. Interpretation, views, forecasts, business
quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group.
This material is provided for information purposes only. It is not a recommendation or advice of any
investment or commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any
commercial losses incurred by any party acting on information in these materials.
Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbH
M: +43 676 534 6852 / E: [email protected] / W: www.ceemeabusinessgroup.com