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Kazakhstan and Central Asia Business Forecast Report Q3 2013

Kazakhstan and Central Asia Business Forecast Report Q3 2013 - new country guide report published

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2014-02-19 08:17:02 - Kazakhstan and Central Asia Business Forecast Report Q3 2013 - a new country guide report on

Kazakhstan´s political risk profile remains largely unchanged going into H213 with the succession issue unresolved. We hold to our view that a plan is in the works and that President Nursultan Nazarbayev´s son-in-law remains in the running for the top spot. However, the failure to develop a workable succession plan is not only undermining investor confidence but increasingly public confidence in governance in the country, lending further urgency to the issue.

We forecast Kazakh real GDP growth at 5.4% in 2013 and 5.5% in 2014 following a 5.0% expansion in 2012. A recovery in the agricultural sector combined with strong investment and consumer spending will drive growth higher this year. However, we caution that Kazakhstan remains vulnerable to external demand dynamics



and that political uncertainty could yet threaten economic growth.

Major Forecast Changes

There have been no major forecast changes since our last quarterly report.

Key Risks To Outlook

Commodity Prices: Our growth forecasts would face downside risks if there were a marked drop in commodity prices, as Kazakhstan is economically dependent upon its extractive industries. We expect gradual moderation in oil prices through 2013, and this is reflected in our current growth and inflation forecasts. However, if a dramatic drop in oil prices were to materialise (most likely as a result of a negative macroeconomic shock to the global economy), our forecasts would probably prove too optimistic.

Kyrgyzstan´s political situation will remain tense over the course of 2013 and into 2014 with ethnic tensions in the south continuing to undermine political stability. We anticipate the nationalist opposition party, Ata-Zhurt, to continue fomenting discontent and calling for nationalisations of mining activities in the country, undermining the country´s ability to attract much-needed foreign investment.

We anticipate little success in the government´s plans to continue with its plan to auction the vast Jeeroy gold deposit as a result of a challenging business environment and unstable political backdrop, which will dampen investor interest in the country. We expect China and Russia to remain the only major foreign investors in projects in Kyrgyzstan as a result of geopolitical aspirations.

Major Forecast Changes

We have substantially downgraded our real GDP growth and current account forecasts for Kyrgyzstan as a result of a very poor outlook for the mining sector and minimal foreign direct investment.

Key Risks To Outlook

A more pronounced global economic slowdown would have a significant impact on Kyrgyz economic growth by way of weakened demand for the country´s commodity exports and even weaker remittance inflows.

A return to violence would also present downside risks. Rising ethnic tension in the south of the country and, reportedly, a growing sense of isolation on the part of the Uzbek minority means we cannot completely rule out further violence in the country.

International ties between Tajikistan and Uzbekistan are set to remain tense this year as Dushanbe is likely to continue pushing for the construction of the Roghun dam. Although there is the potential that the dam project is put on indefinite hold as a result of a World Bank feasibility study, we anticipate no substantial improvement in ties between the two nations.

We anticipate weaker economic growth in Tajikistan in 2013. This comes as a result of our revised expectations for the Russian economy which will weigh on remittance inflow growth this year. Moreover, the continued suspension of gas exports from Uzbekistan is likely to hinder export growth given that national aluminium smelter TALCO accounts for the bulk of gas consumption.

Major Forecast Changes

We have made no major forecast changes in this quarterly report.

Key Risks To Outlook

A sharper-than-expected economic slowdown in Russia or Kazakhstan would have a highly adverse impact on Tajikistan by way of collapsed remittance inflows. Similarly, a collapse in global commodity prices, in particular of cotton and uranium, would weigh on economic growth via lower export receipts.

A more sustained deterioration in tensions between Tajikistan and Uzbekistan over water rights in the region, in particular regarding the construction of the Roghun dam in the former, could have a destabilising effect on the region. This would, in turn, undercut international efforts to stabilise the region ahead of the US military withdrawal from Afghanistan.

Turkmenistan´s shifting rhetoric towards promoting the TAPI pipeline project (aimed at supplying South Asia with gas) over the Trans- Caspian pipeline (which would deliver gas to Europe) underpins our expectation that Turkmenistan´s energy future, and thereby much of its geostrategic orientation will remain anchored in the Asian sphere over the coming decade.

Turkmen economic growth will remain relatively robust over the coming years and we forecast real GDP growth of 10.5% in 2013, down from the government´s 2012 estimate of 11.1%.High hydrocarbon prices combined with increased exports to China will underpin the government´s continued ability to stoke domestic demand via household spending and hefty infrastructure projects. In spite of overtures to WTO membership, we see this as a distant possibility this decade.

Major Forecast Changes

There have been no major forecast changes since our last quarterly report.

Key Risks To Outlook

A collapse in global commodity prices, while not our core scenario, would have a highly deleterious impact on the Turkmen economy given the strong reliance on energy exports, particularly oil and gas. However, we expect that the government has racked up sufficient funds on the back of high energy prices to be able to hold up economic growth in the event that prices remain low for a sustained period.

The tense situation between Uzbekistan and Kyrgyzstan is likely to persist in spite of the potential for a resolution to recent violence.

This is as a result of the failure to agree on border delimitations in the region, which currently cut across ethnic lines going back to Soviet times. Indeed, Kyrgyz nationalist parties have strong incentive to fuel anti-Uzbek sentiment in the southern part of the country. As a result, we see strong potential for recurring violence to persist in the Fergana valley throughout 2013 and into 2014.

We hold to our above consensus forecasts for Uzbekistan´s real GDP growth forecasts in 2013 and 2014 of 7.7% and 7.1% respectively.

Easing global commodity prices will see to it that export volumes are relatively weaker while slower remittance inflows from Russia and China will put downside pressure on the services sector.

Major Forecast Changes

There have been no major forecast changes since our last quarterly report.

Key Risks To Outlook

A sharp moderation in global commodity prices, while not currently our core scenario, would have a significant impact on Uzbekistan, given the country´s high reliance on oil and gas exports.The price of this market report covers 4 quarterly reports on this sector. This quarterly report will be downloadable instantly as a PDF document, with the 3 remaining reports delivered at regular intervals throughout the year.

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Mike King
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