Download KAZAKHSTAN/AZERBAIJAN: Oil can unbalance economies

Document View
Page 1 of 5
« Back to Document View
Databases selected: Multiple databases...
KAZAKHSTAN/AZERBAIJAN: Oil can unbalance
economies
Subjects:
Economic conditions, Industry, International
relations, Politics, Banking
industry, Consumer, Corporate, Debt, Foreign exchange
rates, Foreign investment, Foreign policy, Gas
industry, Government, Economic
growth, Infrastructure, Investment
policy, Manufacturing, Petroleum industry, Public
policy, Population, Private sector, Public
sector, Reforms, Refugees, Regions, National security
Locations:
Eastern Europe, Russia, Azerbaijan, Kazakhstan
Companies:
Commonwealth of Independent States
Publication title:
OxResearch. Oxford: Aug 15, 2006. pg. 1
Source type:
Report
ProQuest document ID: 1103094111
Text Word Count
1232
Document URL:
http://libproxy.nps.navy.mil/login?url=http://proquest.umi.c
om/pqdweb?
did=1103094111&sid=1&Fmt=3&clientId=11969&RQT=309&
VName=PQD
Abstract (Document Summary)
Developing non-energy sectors in Kazakhstan and Azerbaijan.
Stronger macroeconomic policies have placed Kazakhstan in a better position than
Azerbaijan to manage the 'Dutch disease' that often afflicts resource-based
economies. With only half the recoverable oil reserves of Kazakhstan, Azerbaijan
faces a shorter time horizon to leverage its energy wealth for broad-based
development.
Full Text (1232 words)
Copyright Oxford Analytica Ltd. 2006. No publication or distribution is permitted
without the express consent of Oxford Analytica.
http://proquest.umi.com.libproxy.nps.navy.mil/pqdweb?index=4&sid=1&srchm... 8/22/2006
Document View
Page 2 of 5
SUBJECT: Developing non-energy sectors in Kazakhstan and Azerbaijan.
SIGNIFICANCE: Stronger macroeconomic policies have placed Kazakhstan in a
better position than Azerbaijan to manage the 'Dutch disease' that often afflicts
resource-based economies. With only half the recoverable oil reserves of Kazakhstan,
Azerbaijan faces a shorter time horizon to leverage its energy wealth for broad-based
development.
ANALYSIS: Kazakhstan has the best prospects in the Caspian region for sustainable
growth. Its hydrocarbons-driven path has not inflicted the damage on non-energy
sectors characteristic of many oil-producing economies ('Dutch disease'):
GDP growth The IMF projects that Kazakhstan's real GDP growth will reach 8.3% in
2006, but decline to 6.8-7.7% in 2007-10. This would fit the government's declared
objective of attaining an average income of 10,000 dollars per capita by 2012.
Fiscal conditions Kazakhstan's overall budget surplus is expected to reach 5.6% in
2006. Higher oil and gas revenues have permitted a wider non-oil deficit, which
equalled 4.8% of GDP in 2005. Public spending, on housing, education and
healthcare, has increased substantially ( see PROSPECTS 2006: Russian oil
slowdown set to spread - December 5, 2005 ).
NFRK Inflows of oil revenues have enlarged Kazakhstan's oil fund (NFRK) to 8.9
billion dollars, or 14.4% of GDP ( see CIS: Oil bonanza swells state oil funds - May 17,
2006 ). All NFRK assets are invested abroad, easing pressure on the domestic
monetary base and aligning the country's energy revenues with local absorptive
capacity.
External position Robust economic growth and energy-related currency appreciation
have strengthened Kazakhstan's debt management capacity, prompting Moody's to
signal a possible upgrade of its credit rating.
Inflation High economic growth and rapid credit expansion have brought consumer
price inflation from 6.9% to 7.6% in 2004-05. In the first half of 2006, inflation
approached 9%.
Kazakh confidence Yet IMF officials voice confidence in the country's ability to curtail
inflation owing to:
real appreciation of the tenge, which lowers the cost of dollar-denominated imports;
the improved institutional capacity of the National Bank of Kazakhstan (NBK) and its
enhanced ability to sterilise inflows of oil revenues ( see KAZAKHSTAN: Non-oil
sectors will ensure growth - February 10, 2006 ); and
improved management of energy wealth through fuller integration of the NFRK with
http://proquest.umi.com.libproxy.nps.navy.mil/pqdweb?index=4&sid=1&srchm... 8/22/2006
Document View
Page 3 of 5
the national budget and Astana's entry into the Extractive Industries Transparency
Initiative ( see KAZAKHSTAN: Government focuses on mining IPOs in 2007 - April 27,
2006 ).
Non-energy sector performance Kazakhstan has so far displayed no Dutch disease
symptoms. Indeed, in 2000-04, output growth in construction and transport surpassed
the overall industry average. For the same period, manufacturing posted average
annual output increases (in current prices) of 17.4%. This figure, although lower than
the yearly growth rate of 28.5% in the oil and gas sector, is still respectable, especially
given the high concentration of national resources in energy. Labour productivity in
non-energy sectors has also displayed impressive growth, averaging 13.0% per year
in manufacturing and 12.3% in transport.
Hidden dominance However, the close connection between energy and non-energy
sectors requires some qualification. High growth in non-energy sectors is in part
explained by the fact that up to 35% of oil-related activities is formally classified as
construction. Another 9-11% of the oil and gas output is classified as manufacturing
and transport.
Non-energy sectors still capture only a modest share of aggregate capital investment,
and their shares of foreign direct investment (FDI) remain minuscule. For example, in
2004, the oil and gas sector received 63.5% of total FDI inflows, compared with 6.1%
for manufacturing, 1.8% for construction and a mere 1.0% for transport. To sustain
productivity gains in non-energy sectors, Kazakhstan will have to:
accelerate structural reforms in those sectors; and
use a greater portion of NFRK funds for non-energy development.
Agriculture is Kazakhstan's laggard sector: in 2000-04, it averaged annual output and
productivity growth rates of 3.7% and 0.4% respectively. It accounts for one-third of
Kazakhstan's employment but less than 10% of GDP, indicating persistent undercapitalisation and heavy reliance on manual labour.
Currency appreciation Since 2000, the tenge has appreciated about 30% in real
terms against the dollar. Despite this, it is still undervalued; the IMF says it must
appreciate by another 50% to reach its 'equilibrium' value.
While real currency appreciation of this magnitude strengthens the hand of the
country's monetary authorities grappling with inflation, it threatens the competitiveness
of non-energy tradables -- a classic Dutch disease symptom. However, a recent NBK
survey reveals that non-energy exporters are not concerned, primarily because the
bulk of their exports go to Russia, where the tenge/rouble exchange rate has
depreciated. Moreover, the limited non-energy trade that Kazakhstan carries out in
dollars softens the impact of currency appreciation, and mitigates the tension between
inflation control and export competitiveness.
http://proquest.umi.com.libproxy.nps.navy.mil/pqdweb?index=4&sid=1&srchm... 8/22/2006
Document View
Page 4 of 5
Azerbaijan's performance This tension is more pronounced in Azerbaijan where nonenergy sectors have proven less robust and macroeconomic policies less effective
than in Kazakhstan.
Azerbaijan's economic growth path is startling. Real GDP growth jumped from 10.2%
in 2004 to 26.4% in 2005, and reached 38% year-on-year in the first half of 2006. In
the medium term, annual growth rates may reach 20%, as the recently launched the
Baku-Tbilisi-Ceyhan pipeline attains full capacity ( see AZERBAIJAN: BTC pipeline
hails political triumph - June 13, 2006 ).
The benefits are manifest: rising per capita income, declining poverty, increasing
foreign reserves and a falling debt/GDP ratio. Yet the main downside is heightened
inflationary pressures: consumer price inflation, which stood at 5.4% in 2005, is
expected to reach 9.7% by the year-end. Inflation rates are likely to persist at around
8-9% for the rest of the decade.
While this inflation projection is similar to Kazakhstan's, Baku has demonstrated lower
institutional capacity to control it:
Despite the enactment of new central bank regulations, the National Bank possesses
a limited repertoire of monetary instruments to sterilise the dramatic increase in oil
revenues ( see CIS: South Caucasus shows uneven economic development - August
7, 2006 ).
The dispute with Armenia creates incentives to divert revenues to military spending
and intensifies pressures to resolve the refugee crisis stemming from the NagornoKarabakh conflict. These factors have enticed the government to loosen its fiscal and
wage policies, compromising the macroeconomic discipline needed to curtail inflation.
Exchange rate policy has veered from a depreciating crawl in 1999-2002, to a fixed
rate regime in 2002-05 and an appreciating crawl from February 2005. While the
recent switch to a policy of real appreciation has succeeded in slowing consumer price
inflation, the government has demonstrated little appetite for using the manat
exchange rate as an anti-inflationary tool.
Non-energy development The manat's real depreciation in the early 2000s spurred
growth in Azerbaijan's non-oil exports, compensating for the steep decline in foreign
trade following Russia's 1998 financial crisis. In 2000-04, the share of non-energy
products in Azerbaijan's export mix increased from 16% to 23%.
However, by end-2004, Azerbaijan's non-energy exports were only 8% above their
1994 level. Moreover, output in key non-energy sectors remained far below the
volumes obtained at the time of the Soviet collapse. The government has yet to
consolidate all hydrocarbon revenues in its oil fund; its failure to do so highlights
continuing institutional constraints on deploying energy wealth in non-energy sectors.
http://proquest.umi.com.libproxy.nps.navy.mil/pqdweb?index=4&sid=1&srchm... 8/22/2006
Document View
Page 5 of 5
CONCLUSION: Azerbaijan's complicated geopolitical situation increases the
temptation to pursue lax fiscal and monetary policies, heightening reliance on the
exchange rate as a macroeconomic tool. This raises the danger of Dutch disease in
the country's non-energy sectors. By contrast, Kazakhstan might sustain a yearly real
growth of 6-8% in the non-energy sphere, which would be higher than Russia's and
comparable to non-oil producing CIS states.
Copyright © 2006 ProQuest Information and Learning Company. All rights reserved. Terms
and Conditions
Text-only interface
Need help using ProQuest? Try Ask a Librarian Live! Mon.- Fri.0900-1600 (PT). Just click
on the logo below to access our Ask a Librarian page!
http://proquest.umi.com.libproxy.nps.navy.mil/pqdweb?index=4&sid=1&srchm... 8/22/2006