KAZAKHSTAN/AZERBAIJAN: Oil can unbalance economies

Transcription

1 Page 1 of 5 «Back to Document View Databases selected: Multiple databases... KAZAKHSTAN/AZERBAIJAN: Oil can unbalance economies Subjects: Economic conditions, Industry, International relations, Politics, Banking industry, Consumer, Corporate, Debt, Foreign exchange rates, Foreign investment, Foreign policy, Gas industry, Government, Economic growth, Infrastructure, Investment policy, Manufacturing, Petroleum industry, Public policy, Population, Private sector, Public sector, Reforms, Refugees, Regions, National security Locations: Eastern Europe, Russia, Azerbaijan, Kazakhstan Companies: Commonwealth of Independent States Publication title: OxResearch. Oxford: Aug 15, pg. 1 Source type: Report ProQuest document ID: Text Word Count 1232 Document URL: om/pqdweb? did= &sid=1&fmt=3&clientid=11969&rqt=309& VName=PQD Abstract (Document Summary) Developing non-energy sectors in Kazakhstan and Azerbaijan. Stronger macroeconomic policies have placed Kazakhstan in a better position than Azerbaijan to manage the 'Dutch disease' that often afflicts resource-based economies. With only half the recoverable oil reserves of Kazakhstan, Azerbaijan faces a shorter time horizon to leverage its energy wealth for broad-based development. Full Text (1232 words) Copyright Oxford Analytica Ltd No publication or distribution is permitted without the express consent of Oxford Analytica.

2 Page 2 of 5 SUBJECT: Developing non-energy sectors in Kazakhstan and Azerbaijan. SIGNIFICANCE: Stronger macroeconomic policies have placed Kazakhstan in a better position than Azerbaijan to manage the 'Dutch disease' that often afflicts resource-based economies. With only half the recoverable oil reserves of Kazakhstan, Azerbaijan faces a shorter time horizon to leverage its energy wealth for broad-based development. ANALYSIS: Kazakhstan has the best prospects in the Caspian region for sustainable growth. Its hydrocarbons-driven path has not inflicted the damage on non-energy sectors characteristic of many oil-producing economies ('Dutch disease'): GDP growth The IMF projects that Kazakhstan's real GDP growth will reach 8.3% in 2006, but decline to % in This would fit the government's declared objective of attaining an average income of 10,000 dollars per capita by Fiscal conditions Kazakhstan's overall budget surplus is expected to reach 5.6% in Higher oil and gas revenues have permitted a wider non-oil deficit, which equalled 4.8% of GDP in Public spending, on housing, education and healthcare, has increased substantially ( see PROSPECTS 2006: Russian oil slowdown set to spread - December 5, 2005 ). NFRK Inflows of oil revenues have enlarged Kazakhstan's oil fund (NFRK) to 8.9 billion dollars, or 14.4% of GDP ( see CIS: Oil bonanza swells state oil funds - May 17, 2006 ). All NFRK assets are invested abroad, easing pressure on the domestic monetary base and aligning the country's energy revenues with local absorptive capacity. External position Robust economic growth and energy-related currency appreciation have strengthened Kazakhstan's debt management capacity, prompting Moody's to signal a possible upgrade of its credit rating. Inflation High economic growth and rapid credit expansion have brought consumer price inflation from 6.9% to 7.6% in In the first half of 2006, inflation approached 9%. Kazakh confidence Yet IMF officials voice confidence in the country's ability to curtail inflation owing to: real appreciation of the tenge, which lowers the cost of dollar-denominated imports; the improved institutional capacity of the National Bank of Kazakhstan (NBK) and its enhanced ability to sterilise inflows of oil revenues ( see KAZAKHSTAN: Non-oil sectors will ensure growth - February 10, 2006 ); and improved management of energy wealth through fuller integration of the NFRK with

3 Page 3 of 5 the national budget and Astana's entry into the Extractive Industries Transparency Initiative ( see KAZAKHSTAN: Government focuses on mining IPOs in April 27, 2006 ). Non-energy sector performance Kazakhstan has so far displayed no Dutch disease symptoms. Indeed, in , output growth in construction and transport surpassed the overall industry average. For the same period, manufacturing posted average annual output increases (in current prices) of 17.4%. This figure, although lower than the yearly growth rate of 28.5% in the oil and gas sector, is still respectable, especially given the high concentration of national resources in energy. Labour productivity in non-energy sectors has also displayed impressive growth, averaging 13.0% per year in manufacturing and 12.3% in transport. Hidden dominance However, the close connection between energy and non-energy sectors requires some qualification. High growth in non-energy sectors is in part explained by the fact that up to 35% of oil-related activities is formally classified as construction. Another 9-11% of the oil and gas output is classified as manufacturing and transport. Non-energy sectors still capture only a modest share of aggregate capital investment, and their shares of foreign direct investment (FDI) remain minuscule. For example, in 2004, the oil and gas sector received 63.5% of total FDI inflows, compared with 6.1% for manufacturing, 1.8% for construction and a mere 1.0% for transport. To sustain productivity gains in non-energy sectors, Kazakhstan will have to: accelerate structural reforms in those sectors; and use a greater portion of NFRK funds for non-energy development. Agriculture is Kazakhstan's laggard sector: in , it averaged annual output and productivity growth rates of 3.7% and 0.4% respectively. It accounts for one-third of Kazakhstan's employment but less than 10% of GDP, indicating persistent undercapitalisation and heavy reliance on manual labour. Currency appreciation Since 2000, the tenge has appreciated about 30% in real terms against the dollar. Despite this, it is still undervalued; the IMF says it must appreciate by another 50% to reach its 'equilibrium' value. While real currency appreciation of this magnitude strengthens the hand of the country's monetary authorities grappling with inflation, it threatens the competitiveness of non-energy tradables -- a classic Dutch disease symptom. However, a recent NBK survey reveals that non-energy exporters are not concerned, primarily because the bulk of their exports go to Russia, where the tenge/rouble exchange rate has depreciated. Moreover, the limited non-energy trade that Kazakhstan carries out in dollars softens the impact of currency appreciation, and mitigates the tension between inflation control and export competitiveness.

4 Page 4 of 5 Azerbaijan's performance This tension is more pronounced in Azerbaijan where nonenergy sectors have proven less robust and macroeconomic policies less effective than in Kazakhstan. Azerbaijan's economic growth path is startling. Real GDP growth jumped from 10.2% in 2004 to 26.4% in 2005, and reached 38% year-on-year in the first half of In the medium term, annual growth rates may reach 20%, as the recently launched the Baku-Tbilisi-Ceyhan pipeline attains full capacity ( see AZERBAIJAN: BTC pipeline hails political triumph - June 13, 2006 ). The benefits are manifest: rising per capita income, declining poverty, increasing foreign reserves and a falling debt/gdp ratio. Yet the main downside is heightened inflationary pressures: consumer price inflation, which stood at 5.4% in 2005, is expected to reach 9.7% by the year-end. Inflation rates are likely to persist at around 8-9% for the rest of the decade. While this inflation projection is similar to Kazakhstan's, Baku has demonstrated lower institutional capacity to control it: Despite the enactment of new central bank regulations, the National Bank possesses a limited repertoire of monetary instruments to sterilise the dramatic increase in oil revenues ( see CIS: South Caucasus shows uneven economic development - August 7, 2006 ). The dispute with Armenia creates incentives to divert revenues to military spending and intensifies pressures to resolve the refugee crisis stemming from the Nagorno- Karabakh conflict. These factors have enticed the government to loosen its fiscal and wage policies, compromising the macroeconomic discipline needed to curtail inflation. Exchange rate policy has veered from a depreciating crawl in , to a fixed rate regime in and an appreciating crawl from February While the recent switch to a policy of real appreciation has succeeded in slowing consumer price inflation, the government has demonstrated little appetite for using the manat exchange rate as an anti-inflationary tool. Non-energy development The manat's real depreciation in the early 2000s spurred growth in Azerbaijan's non-oil exports, compensating for the steep decline in foreign trade following Russia's 1998 financial crisis. In , the share of non-energy products in Azerbaijan's export mix increased from 16% to 23%. However, by end-2004, Azerbaijan's non-energy exports were only 8% above their 1994 level. Moreover, output in key non-energy sectors remained far below the volumes obtained at the time of the Soviet collapse. The government has yet to consolidate all hydrocarbon revenues in its oil fund; its failure to do so highlights continuing institutional constraints on deploying energy wealth in non-energy sectors.

5 Page 5 of 5 CONCLUSION: Azerbaijan's complicated geopolitical situation increases the temptation to pursue lax fiscal and monetary policies, heightening reliance on the exchange rate as a macroeconomic tool. This raises the danger of Dutch disease in the country's non-energy sectors. By contrast, Kazakhstan might sustain a yearly real growth of 6-8% in the non-energy sphere, which would be higher than Russia's and comparable to non-oil producing CIS states. Copyright 2006 ProQuest Information and Learning Company. All rights reserved. Terms and Conditions Text-only interface Need help using ProQuest? Try Ask a Librarian Live! Mon.- Fri (PT). Just click on the logo below to access our Ask a Librarian page!