Central Asia’s Truculent Trio Test
Central Asian financial markets lacked clear direction after a maelstrom of political, economic a banking system, and international lender cross-currents punctured early year euphoria. Only Kazakhstan is in a benchmark frontier equity index on the MSCI, while Azerbaijan and Mongolia external bonds are tracked on JP Morgan’s off-index NEXGEM list. In recent weeks Azerbaijan’s President Ilham Aliev won another term in a controversial election with suspect margins and turnout; Kazakhstan’s currency was battered in the wake of post-US sanction ruble selloff; and Mongolia got a mixed review under its International Monetary Fund program on lingering fiscal and financial system risks. Into the half year the specter of repeated commodity crisis has abated, but the Asian Development Bank (ADB) cautioned in its sub-regional forecast about output slowdown as government succession paths remain messy or murky.
Azerbaijan bonds were upset as major opposition parties boycotted President Aliev’s poll, and his handpicked election commission gave him an 85% result on 75% voter participation with “no irregularities.” One debate was held where rival candidates did not directly challenge his leadership, as Europe’s international observer mission highlighted the absence of “genuine competition” amid continued civil society and press curbs. Official statistics put first quarter growth at 2.3%, with the non-oil outperforming the hydrocarbons sector, although agriculture, construction and tourism all fell. The ADB predicts below 2% expansion for the year and 7% inflation with post-devaluation exchange rate stability, as the current account surplus tops 6% of GDP. Foreign direct investment was over $5.5 billion in 2017, 85% concentrated in energy and the Shah Deniz field in particular. According to the German head of the Foreign Trade Chamber, bilateral volume will languish due to “poor” export diversification despite Baku’s plans for new industrial plants.
The manat has been steady at 1.7/dollar, and the share of bank deposits in that unit roughly doubled to 40% the past year. The central bank cut the refinancing rate 2% to 11% in April and assured the public of ample cash on hand after spillover from Russia and Turkey troubles. However the restructuring of giant International Bank, to be prepared for privatization, is proceeding slowly as assets slipped below $5 billion awaiting foreign creditor approval of a $3.3 billion workout proposal. An audited financial statement has not yet been released for 2017, and eventual sale must be endorsed by the State Property Committee which previously blocked transactions.
Kazakhstan shares were up almost 20% on the MSCI frontier gauge in the first quarter, as growth came in stronger than expected at 4% with good mining and manufacturing contributions. The latter was aided by the Nurly Zher housing and infrastructure stimulus, and Economy Ministry steps to reduce paperwork requirements 30% to bolster small business. Higher oil prices and production joined with trade diversification to new markets like Vietnam to help the balance of payments and foreign reserves, at $90 billion including the separate stabilization fund. The central bank is easing as inflation may drop below the 5-7% target band, and it dismissed the 3% tenge decline over the week tighter US sanctions were imposed against Moscow as a bump.
Bank fragility stayed in the spotlight as parliament passed a bill to close capital flight loopholes, and another round of foreign currency to tenge mortgage conversion was completed using the pre-devaluation rate. The Halyk-Kazkommertsbank merger timetable slipped to the second half and Standard & Poor’s kept KKB at “B+” credit watch, as it called the combination a “challenge under weak economic conditions.” The state airline, uranium producer, and telecom operator will soon be offered in stock exchange IPOs, and officials travelled to China on a promotion tour, but investment adviser Rothschild urged a quicker pace of $70 billion sovereign wealth fund divestment including pre-offering sales.
Mongolian bonds rose as it got a third IMF tranche under its overall $5.5 billion donor package, following a growth upgrade to 5% on flagship copper project expansion. However the government demanded the extradition of the former prime minister from the US to face corruption charges, and the Fund warned of still outsize public debt at 85% of GDP. Double-digit bank bad loan levels and credit increases also endure, as legislators debate an interest-rate cap for borrowers that could again pave the way for Central Asia’s familiar boom-bu
