Kazakhstan Infrastructure Report Q1 2009

Kazakhstan is not invulnerable to the global financial crisis or to slippage in the prices of oil and gas - of which it is a major producer. At this stage, BMI envisages that real GDP growth will slow from 8.5% in 2007 to 3.4% in 2008 to just 1.7% in 2009. However, we are looking for growth to accelerate again from 2010. In spite of this, we envisage that infrastructure spending will remain robust.

In short, Kazakhstan represents something of an infrastructural bonanza. A sparsely populated, increasingly wealthy, landlocked country which has a government that is committed to developing road links to countries that provide access to major export markets. Kazakhstan is a crucial part of the Silk Road terrestrial trading routes between the Asia-Pacific region (and China especially) and Europe (and Russia especially). The crucial hydro-carbons industry needs substantial new investment if production and exports are to increase as planned. Further, the USSR-era has left Kazakhstan with a curious legacy - the need to import electricity and gas to supply the major cities in the south and the southeast of the country (including Almaty, which is the former capital and still by far the most populous city in Kazakhstan). The government has a vested interest in promoting pipelines and power distribution networks which will enable Kazakhstan to meet its requirements with locally produced energy.

For most developing countries, growth and foreign investment depends on improving governance, improving transparency and a reduction in political/ policy risk. Kazakhstan is in the unusual position where it is low ranking on many surveys of transparency and good governance really do not matter. This is because the main protagonists in the hydro-carbons industry - and indeed other sectors where infrastructure is being built-up rapidly - are risk tolerant. Put bluntly, domestic State Owned Enterprises (SOEs), multi-national oil companies and multi-lateral institutions such as the World Bank and the European Bank for Reconstruction and Development (EBRD) are largely insensitive to external perceptions of risk in Kazakhstan.

In the short-term, though, residential construction in Almaty and Astana has ground to a halt - essentially as a result of the global credit crunch. The Kazakh banks have become unable to get funding from wholesale markets - with the result that the construction companies' credit lines have become closed. The government, in conjunction with the Kazyna Sustainable Development Fund and the EBRD have taken steps to address this situation.