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Kazakhs take emerging markets by storm

By Chris Bird, Reuters, 6 November 1997

ALMATY, Nov 6 (Reuters) - Kazakhs have galloped on to the emerging market scene with the lightning speed of their Mongol ancestors and lending institutions on Thursday heaped praise on the former Soviet republic's market reforms.

"Kazakhstan is in an excellent position in comparison to its neighbours," Christof Ruehl, principal economist at the European Bank for Reconstruction and Development (EBRD), told a news conference in the capital Almaty.

"Foreign direct investment is higher than anywhere else in the CIS in per capita terms and is the fifth largest in the region (eastern Europe)," Ruehl said. "With a large educated workforce and a chance to reallocate capital, growth prospects could be better than those in east Asia."

Leif Hansen, the cautious head of an International Monetary Fund mission to Kazakhstan, was also fulsome in his praise for the former Soviet republic, a vast tract of arid steppe stretching from the Caspian Sea to China.

"Inflation has come down very rapidly this year, the exchange rate has remained stable and economic growth has resumed," Hansen said. "This is a very encouraging development."

Kazakh finance minister Alexander Pavlov said inflation for 1997 would total 13-14 percent, well inside this year's 17 percent target set with the fund's blessing.

Last December, plucky Kazakh officials announced their determination to put their far-flung republic on the global financial map with a $200 million debut Eurobond.

A year on, the Kazakhs have done just that. The first bond was snapped up and foreign investors devoured a second $350 million Eurobond issue in September.

"The disappearance of inflation has seen the government turn to paper instead," the EBRD's Ruehl said. "Its budget deficit is well below most east European countries," he said of the current budget gap, now around four percent.

With Kazakhstan boasting huge reserves of oil and gas around the Caspian Sea basin, foreign oil companies have promised billions of dollars in investment this year.

The China National Petroleum Corp signed a whopping $9.5 billion deal in September and its promise of an export pipeline, to carry crude from western Kazakhstan to China's Xinjiang Province, has changed the republic's fundamentals.

Kazakhstan's export bottleneck -- the landlocked republic is still beholden to former colonial master Russia for access to Soviet-built pipelines -- had dragged down its debt ratings.

A smart suit and a mobile telephone have replaced the bow and sword in the search for western plunder.

But while investment houses and lenders welcome the new Kazakh invasion, corruption, a potentially wider budget gap -- the finance ministry is proposing a budget deficit of 5.5 percent for 1998 -- and social hardships cloud the republic's wider horizons.

Earlier this week, London-based consultancy Control Risks put Kazakhstan up with Russia and Nigeria as one of the world's most corrupt states. "We are doing all we can to eliminate graft," said Pavlov.

The IMF's Hansen said the Kazakh government needed to improve tax collection and that upcoming pension reform could threaten the republic's hard-won economic stability.

"One of the main challenges is the introduction of pension reform," Hansen said. "The reform is a very courageous and ambitious one and will require delicate handling by the National Bank (of Kazakhstan) and the finance ministry."

An international financial source said he was worried by September's Eurobond as the cash was to go to paying off 36 billion tenge ($474 million) worth of pension arrears. "This is mortgaging your future for old debts," he said.

Kazakhstan is also quick to feel the blast of storms on global markets. A senior Kazakh official said foreign investors had stayed away from auctions of Kazakh treasury bills this week following tumult on the Hong Kong stock exchange.

($1 - 75.80 tenge)

--Almaty Newsroom, +7 3272 509410