Kazakhstan Infrastructure Report Q4 2009

Infrastructure spending, which has felt the strain of the slowdown, has continued to feel it in 2009. The government's willingness to plough money into the economy, and some big loans from foreign lenders and multilateral institutions for major projects, will soften but not eliminate the pain. Kazakhstan's outlook is brighter than many countries, thanks to its natural resources and its position as the potential bridge between China and Europe.

In BMI's Q409 Kazakhstan Infrastructure Report we forecast that construction industry value will contract by 1.39% to a value of KZT1.574 trn (US$11.66 bn) in 2009.. Construction spending will then show respectable growth of 2.88% in 2010 before accelerating to more than 6% annual growth in 2011 and then to more than 9% growth by the end of our forecast period, which has been extended to 2014.

The country's construction industry accounts for just below 10% of its GDP. The percentage creeps closer to the 10% mark over the years of our forecast, but doesn't climb above it.

Kazakhstan's GDP declined 2.3% in the first half, according to the country's statistics agency. That is better than initially feared for the first half, but still confirms the impression of an economy that isn't withstanding the global economic slowdown. BMI now forecasts GDP in 2009 to contract 1.9% after an estimated 3.0% growth in 2008. Our forecast is for the economy to resume its expansion in 2010, at a rate of 2.4%, and then accelerate to 5.5% growth in 2011.

For many years Kazakhstan represented something of an infrastructural bonanza. Kazakhstan is a sparsely populated, increasingly wealthy, landlocked country, which has a government committed to developing road links to countries that provide access to major export markets. Even amid the economic slowdown, the country's ambitions in the transport sector can sound impressive in their sweep, involving as they do countries from the Middle East to Asia.

Kazakhstan is a crucial part of the Silk Road terrestrial trading routes between the Asia-Pacific region (China especially) and Europe (Russia especially). In a sign of the international commitment to opening this new silk route, the World Bank and Kazakhstan signed the agreement on a loan of more than US$2 bn in the latest quarter to help build the Kazakh portion. Estimates of the cost of this transit corridor can run to more than US$7 bn.

The crucial hydrocarbons industry needs substantial new investment if production and exports are to increase as planned. The government is again stepping in with KazMunaiGaz taking over the Pavlodar refinery in the latest quarter and planning hundreds of millions of dollars in investment.

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 that will enable Kazakhstan to meet its requirements with locally produced energy.

For most developing countries, growth and foreign investment depends on solid governance, improving transparency and a reduction in political/policy risk. Thanks to its geographic position and its resources, Kazakhstan has been in an unusual position where its low ranking in many surveys of transparency and governance has not deterred investments. Such is its strength that even a scandal involving uranium reserves that seemed to reach the upper ranks of the country's establishment doesn't seem to have done much damage.

The China National Petroleum Corp.'s joint venture with KazMunaiGaz to buy Kazakhstan-based MangistauMunaiGaz from Indonesia's Central Asia Petroleum, agreed in the third quarter and now expected to close on Dec. 1, shows the appetite for the country's resources.

State-owned Kazakhstan Development Bank, together with the World Bank and the European Bank for Reconstruction and Development, has financed the development of Kazakhstan's electricity infrastructure. State-owned energy company KazMunaiGaz's annual capital expenditure ??