Kazakhstan’s Chilly Privatization Promotion

Kazakh shares stayed in the back of the MSCI frontier pack with a 45 percent drop despite President Nazarbaev’s whirlwind investor trip to London with a declared package of over 50 small and large company exchange privatizations in coming years. However the record of “people’s” IPOs since 2012 has been thin with only two flotations, and the current recession and post-devaluation 30 percent currency loss against the dollar will further hurt prospects. The state oil and gas company recently got a $5 billion injection from the sovereign wealth fund to service debt as usable foreign reserves may be only a fraction of the $90 billion reported. The budget has swung to deficit on stimulus spending, and energy operators are demanding lower taxes given global prices. Inflation spiked to 15 percent with the exchange rate float coinciding with a new central bank head in a bid for confidence ahead of a “winter chill,” in the President’s words. While in the UK he signed dozens of deals worth almost $10 billion, and presented a dizzying range of transport and technology infrastructure projects striving to avoid the dashed fate of previous special economic zones. An offshore financial center modeled on Dubai is also in the works where the local stock exchange may move using facilities to be built for the upcoming Expo 2020. While the EU is the main oil export market, China is the biggest commodity partner overall and continued weakness there could extend GDP contraction. The tenge has slipped below 300/dollar with occasional intervention and may have a further 10 percent to fall to also realign with the stronger ruble. The peg departure was a shock but obviated the direction taken by next-door Kyrgyzstan where foreign currency sales are now banned due to som pressure. The banking system, still suffering a hangover from the 2008-09 crisis, may experience additional trouble as interest rates were hiked to 15 percent and next year’s budget pares government direct small business lending. The sovereign rating may soon be relegated to junk by at least one agency, which could accelerate plans to develop Islamic sukuk bond alternatives.

Ukraine stocks were down around the same as MSCI laggards but bonds have soared an equal 40 percent on the successful restructuring under the IMF program, which removed credit rating default status. However the $3 billion owed to Russia from the ousted predecessor regime has not been resolved, although President Putin suggested stretching repayment as a compromise still for the full amount. His Finance Minister warned of court resort should December obligations not be met, which could violate the Fund’s lending into arrears policy absent a determination they are commercial not official or can be renegotiated under another rationale. Corporate restructurings have also reached impasse in cases like Metinvest and Ferrexpo, and despite a GDP growth return in the last quarter and EU free trade onset in January agriculture and metals are slumping globally. Bank late and bad loans are at 20 percent of the total and the currency is due to slip toward 30/dollar keeping inflation around 25 percent. Output collapse will near 10 percent this year, and ruling coalition setbacks in parliamentary elections have stalled fiscal reforms with another harsh winter looming.