Economist for Russia and the CIS of Renaissance Capital Sophia DONETS:
DEMAND FOR KAZAKHSTAN AMONG INVESTORS EXCEEDS SUPPLY
Foreign investors are showing interest in Kazakhstan and looking forward to the continuation of privatization of large state-owned companies. In the light of the initiated economic support measures, funding from the sale of state stakes in national companies could replenish budget resources for these purposes. Sophia DONETS, economist for Russia and the CIS of the investment company Renaissance Capital, talked through this in an interview with Interfax-Kazakhstan agency.
- As you know, the President of Kazakhstan set a goal for the government financial and economic bloc to achieve 4.7–5% GDP growth in 2020. In your opinion, how realistic is it to achieve this benchmark?
- Realities in the CIS teach us to be more conservative in terms of growth assessment, and a 4% benchmark seems an excellent figure to us across the common post-Soviet space.
In 2019 the growth was 1% higher than we expected at the beginning of the year. I would not rule out positive surprises to this end next year as well: we see more upside than downside for our 4% forecast. Though we stick with more inertial forecast based on a vision of consumption, investment and exports-imports in 2020. What happened at the end of last year or the beginning of this year does not allow us to make extremely positive export forecasts for obvious reasons: the OPEC + agreement continues to operate, and a negative over the Chinese virus has been added. Therefore, we dwelled on the opinion for 4%.
Of course, if to compare 2020 with 2019 and analyze why it is a little more restrained than last year, we will see two factors - the external situation with not very optimistic outlook on what will happen to the world's raw materials market, and the second factor - the year 2019 was marked by significant fiscal incentives, including those aimed at supporting consumption through wage indexation. We connect these incentives with the electoral cycle; therefore, we believe that this year there will be slightly more restrained dynamics in this field. At the same time, the fiscal stimulus remains, significant tax breaks have been announced, which can produce very good results for growth not only in 2020, but also for future prospects.
- In words of the Minister of National Economy, GDP growth of 4.7-5% will be achieved by attracting investment. How possible is it, is Kazakhstan really attractive to investors?
- I would say that Kazakhstan is a very popular destination for investors. We believe that Kazakhstan is a good combination of strong growth, determined by fundamental characteristics: the positive demography, strategic location between Europe and China, balanced geopolitical position of the country and, naturally, availability of resources. The balanced and stimulating policy complements all this. That is, the country's reserves are quite high, it has a good stable fiscal position, but at the same time it has a sufficient focus on supporting growth, unlike, for example, what we saw in the previous six years in Russia. In Kazakhstan, with high levels of sustainability the focus on maintaining growth has already paid off.
Investors in the capital market are observing the steady growth, stable performance of public debt, reserves, the availability of the National Fund, moderate deficit, as well as positive balance of payments - indicators by which Kazakhstan is in the top positions in the region, so this is one of those backgrounds, which is of great interest to the investment community.
One can add that everyone is looking forward to privatization continuation, putting up large assets for the market. If the government relies on an influx of investors, it would be interesting to see the privatization process development. I would say that now demand for Kazakhstan exceeds supply, and the growth potential here is big.
The same thing happens to debt securities: Kazakhstan’s high rating is confirmed by the fact that actual returns on it are lower than in Russia. This is the only post-Soviet country, which has such a position, a negative spread with Russia.
- How can Kazakhstan use this situation to its benefit?
- If we go back to the history of privatization, it is worth noting that the government announced large-scale measures to reduce the tax burden on small and medium-sized businesses, a three-year amnesty, and, of course, privatization revenues could replenish extra budgetary resources to fund measures to support growth.
Usually, the arrival of foreign investment is a positive factor for the corporate sector, as it brings along higher requirements for return on investment, namely transparency and predictability of business and, from this point of view, both the corporate sector and the domestic investor usually win.
Balanced external and internal investment activism increases the capital market attractiveness. An external investor is more volatile and reacts to any positive and negative internal and external events around the country, and can also trigger capital flows. Therefore, the development of the base of domestic investors is very important with the help of both institutional investors and tax incentives, for example, for private investors.
- Recently, Kazakhstan's Minister of Finance said that this year the country will try to borrow from the domestic market and limit foreign borrowings. How do you think our Finance Ministry will succeed and how rational it is, not only in the light of the implementation of the president’s orders to reduce the size of external borrowings, but also the situation in the economy as a whole?
- I would enumerate a set of factors that can impact in various aspects. On the one hand, Kazakhstan's public debt is small by general standards, including the external one, but the country's total external debt, on the contrary, is one of the highest in the region. In this sense, the state policy to give preference to the domestic debt over the external one can be considered as a good example for the corporate sector - rational balance needs to be maintained.
In addition, the state manages cash flows in two currencies and, if there is no need for dollars and euros to maintain balance, but there is a need to avoid uncertainties linked to conversion, this can also reduce the incentive to enter the foreign market.
On the other hand, there is the demand from external investors in case of low rates and good external conditions for offering.
Returning to the domestic market, it is worth noting that investors are looking forward when they can comfortably enter Kazakhstan's domestic market. That is, external investors are interested not only in Eurobonds, but also in Kazakhstan's local debt. Local bonds have good returns. At the same time, according to many investors, the national currency - the tenge - is rather underestimated, and there is considerable potential for its strengthening in combination with an almost double digit bond yield.
The domestic market is a subject of great interest to investors, and if the government gets its priorities right in the domestic market this year, this will attract the attention of both local and external investors.
As for external investors' expectations from Kazakhstan's market, they would like to see higher liquidity, get connected to Euroclear and a more clearly formed yield curve for government securities. In general, there are no contradictions or conflicts here – it's possible not to borrow from the foreign market, pay closer attention to the domestic market and still get an influx of external investors.
- The theme of the day is the coronavirus, which is affecting the global economy. In your opinion, will the virus outbreak affect the economy of Kazakhstan?
- Of course, we will feel the negative impact. Now we are betting that this effect will be short-lived: as experience from previous epidemics shows, they last no more than 3-5 months. The virus will affect Kazakhstan and Russia through commodity markets - prices and, possibly, volumes of deliveries. Another thing is that we already have the OPEC + agreement, and, in some sense, in terms of volume it somehow “offsets” the past. On the other hand, as for prices we are likely to see a downside and a decline in export earnings. According to our estimates, the economy of Kazakhstan is still quite sensitive to fluctuations in oil prices. At $ 50 per barrel, we can see GDP growth at 3.2% and the tenge at 390 / $ 1, which is close to the 2019 figure. This is not a negative scenario, because the tenge was already at these levels last year, and growth above 3% is still a good performance for this region.
- Thank you for the interview!
March, 2020
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