Central Asia’s Doubtful Dictated Outcomes
The undisclosed death and power vacuum left by Uzbekistan’s post-independence strongman Karimov upset sub-regional investors already wary about succession planning and economic drift, as the few available and illiquid financial market outlets shuddered in response. Kazakhstan’s MSCI frontier index result went negative, although President Nazarbaev may be grooming his daughter to take over after naming her deputy prime minister, and a slew of younger officials who served over decades in power jockey for position. GDP growth was barely positive in the first half, with agriculture a lone bright spot up 3 percent on overseas sales including to post-sanctions Iran. The banking system is still in trouble almost a decade after crisis forced external bond defaults and state rescue, and the government has turned to the World Bank and Asian Development Bank for cleanup aid and technical assistance. It has returned to sovereign bond issuance with an emphasis on Islamic buyer diversification through sukuk placement, and sharia-friendly financial services are a linchpin of the new Astana offshore hub launched last year. As a strategic participant in China’s One Belt One Road natural resources and infrastructure outreach, the President was invited to the G-20 summit in Hangzhou but reaffirmed his friendship with Russian counterpart Putin, as the two countries are joined in the Eurasia Economic Union with Belarus. There President Lukashenko, who released jailed opponents after the EU relaxed trade restrictions, imposed a September deadline for his ministers to develop fresh foreign investor overtures, but progress has been minimal. The IMF is in talks on another program, but insists on genuine privatization rather than the halting asset redeployment which has not generated revenue or boosted productivity in the past. A Russian fund infusion staved off balance of payments and currency crunches earlier this year, but Moscow has indicated additional help may be difficult with its own recession and international reserve pressures.
Azerbaijan’s foreign bond reeled amid rumors of a third devaluation as bank hard currency demand continues to overwhelm the $30 billion sovereign wealth fund. The economy will shrink 3 percent this year, according to the IMF, as $5 billion is sought from Western development lenders for the Southern Gas pipeline, which will ship directly from the Caspian Sea into Europe. President Aliev has freed imprisoned political and media figures to allay human rights criticism, and has expressed willingness in observing reporting requirements under the Extractive Industries Transparency Initiative. He hired consulting giant McKinsey to prepare a long-term competitive strategy, and the US Secretary of State and EBRD head praised these moves in separate visits. The corruption-ridden customs process has been overhauled, but state banks are still in trouble from fraud and mismanagement. The once-pegged manat is on a path toward 2 per dollar, but authorities insist a crash and IMF resort will be avoided, unlike in nearby Mongolia, where the tugrik fell 10 percent in a month and the benchmark interest rate was hiked 5 percent to 15 percent in desperate defense. A Fund delegation arrived in August to find the budget deficit exploding to almost 20 percent of GDP even after spending restraint, as $1.7 billion in medium-term commercial debt repayments top reserves’ dictated space.
