Kazakhstan’s Radical Recovery Rethink

Kazakhstan shares, flat through May on the MSCI Index, sold off after security forces battled with alleged Islamic terrorists in a provincial oil town, as President Nazarbaev pledged an all-out crackdown. The incident followed massive protests for mortgage relief and land reform which caught the authorities off-guard, and obscured positive growth forecasts this year from previous recession with higher oil prices and good construction numbers. First quarter contraction was 1 percent, with banks still fragile and inflation above 15 percent post-devaluation. The current account deficit was near $1 billion and a gradual surplus return is predicted in 2017, but the errors and omissions category remains large as a proxy for unreported capital flight. The unrest has heightened investor worry about the post-Nazarbaev path after his party trounced the nominal opposition in parliamentary elections, and he again shook up his cabinet and leading advisers with no preferred successor. The impasse came as a deal was struck with joint venture partners over future operation of the mammoth Tengiz field, and infrastructure projects were again prominent in discussions with bilateral and multilateral lenders after years of go-it-alone strategy. An IMF program has never been considered, although the CIS’ other oil exporter and depreciation case, Azerbaijan, recently hosted a mission with the concept in play. However sovereign wealth fund and reserve assets are back up to almost $40 billion, and the currency has firmed with central bank purchases and steeper interest rates. Bank restructuring and recapitalization is now a priority, including at internationally-active IBA where fraud was also discovered. President Aliev would find a Fund assistance request likewise subject to outcry from pro-democracy groups after political enemies and anti-corruption journalists were jailed. His hard-line stance was in the mix of shareholder action at multinational oil company meetings as BP and others have reduced their country presence.

Balkan markets were thrown by another election bout, as Croatia lost positive momentum with a no-confidence vote against the compromise technocrat Oreskovic government by his coalition partner. A multi-year recession ended last year with 1.5 percent growth, and the first quarter pace was double that figure on revived consumption and tourism, coupled with an inflow of EU structural funds. The Finance Minister presented an ambitious tax overhaul and privatization agenda before the political infighting, prodded by unions against these changes. Barring a successful reshuffle snap polls will be rerun with another prolonged inertia period. Serbia went down this road already and a fresh cabinet will be formally announced in mid-June, with the SNS party in the majority closely aligned with the IMF program. EU accession negotiations will resume on the first two of thirty-five outstanding chapters to be closed by an end-decade deadline. The fiscal deficit 4 percent of GDP target was met with help from telecom frequency auctions, and the government will revisit its commitment to slash the civil service. Romania’s budget consolidation has not aided stocks, down over 5 percent on the MSCI Index through May, on 4 percent economic growth and negligible 0.5 percent inflation. June local elections will pave the way for national ones likely again in December, with the socialist PSD in the early lead for the horse-trading hysteria and jockeying.