BofA ML visited Almaty on 27 January, meeting National Bank, several other banks and a local independent political think-tank, the Institute of Political Solutions. The attendees conveyed considerable optimism on the general economy this year, largely based on hopes for active government support, complemented by tentative recovery in construction and banking. On the other hand, local experts support our view that domestic politics might continue to dominate the news flow in the country due to the possible evolution of political succession intrigue.


Optimism on economy is based on public spending hopes

The banking sector is showing positive signs of a turnaround, with robust 14% yoy loan growth driven by a healthy corporate sector and the banks’ renewed interest in SME and retail borrowers. We expect the sector to grow robustly in 2012, at close to the pace of 2011, which could also lead to rising competition for deposits, potentially supporting higher interest rates.

The performance of the crisis-hit construction sector has also been broadly positive, but still mixed. There has been a widely acknowledged, albeit tentative, recovery in real estate prices and rising demand. However, there is still a significant overhang of unfinished projects from 2006-07, which might add to the pressure on the market should there be a sell-off in the near future. One bank estimates that 30-40% of real estate projects from 2007 are yet to be completed and sold. Saying that, we think that the long-awaited implementation of the asset impairment mechanism in the banking system could bring renewed pressure to the market.

The official forecast of 7% real growth this year is little contested among local experts, but most believe that it will depend heavily on further hikes in public spending. Close to everybody expressed confidence that public spending will be sufficient to ensure the expected growth, although considerable budget amendments could be needed, while acknowledging the adverse effects should spending slow. There has been a positive trend of rising private consumption, but this is rooted in massive wage and pension indexations over the past several years.


Very little threat to KZT stability

The meetings lent support to our view that the tight peg of KZT/USD is likely to remain around current levels; nobody expects a major correction of the exchange rate in the near future. NBK officials quoted KZT147-150/USD as the likely corridor for the foreseeable future, unless there is a very sharp drop in oil prices similar to that seen in 2008-09.


Politics to continue to dominate the headlines

The experts we met suggested that presidential succession plan might have already been initiated, which could explain significant part of political news from the country including the recent outbreak of violence in Zhanaozen. We were surprised by the opinion that such transition might involve the separation of political and economic power, ie, the emergence of a formal president with no control over the country’s major economic assets, whereas the current president might maintain political influence through new status of the leader of the nation. The full transfer of economic and political control from the current president is regarded as less likely for image considerations and due to a lack of trusted successors in the president's immediate family.

Speaking about potential protests, local experts pointed out that the likelihood of a liberal middle-class movement is limited by the small size of the country’s middle class. However, numerous disadvantaged rural groups could stage protests, potentially boosted by existing nationalist and even separatist sentiments. We think that the latter suggests a limited risk of widespread protests, given strong government's ability to address arising social problems through higher spending.


Political uncertainties might offset upside risks to economy

Overall, our view that domestic politics will dominate market view on the country this year was supported by our visit. The lack of clarity on the future political leadership might prevent the correct risk assessment on the country for now, despite the robust economic outlook. However, there are upside risks to our below-consensus 4.1% real GDP forecast from potential hikes in public spending. Thus, although the political transition might still be far from over, the scope for continued fiscal support is likely to remain in place this year.

source: BofA ML