Clare Nuttall in Almaty -

The Eurasian economies are expected to see a slowing of growth in 2009, as a consequence of falling prices for oil and other commodities.

The Kazakh government forecasts that the economy will grow on average by between 2.7% and 4.1% a year from 2009-2013. GDP per capita is projected to reach just over $13,000, considerably lower than the earlier forecast of $15,737.

This follows almost a decade during which GDP growth averaged just under 10% a year. The much lower forecasts are a consequence of the dramatic decrease in the prices for oil and other commodities, which make up the bulk of Kazakhstan's exports, since mid-2008.

In Uzbekistan, the European Bank for Reconstruction and Development (EBRD) forecasts a gradual decline in GDP growth from 9.5% in 2007, to 8% in 2008 and 7% in 2009. Azerbaijan, which saw a stunning 23.4% expansion of the economy in 2007, has a growth forecast of 17% in 2008 and 15% in 2009.

Countries such as Kyrgyzstan and Tajikistan, which are less dependent on commodity exports, have also come under pressure due to the slowdown in their trading partners - chiefly Russia and Kazakhstan. The smaller CIS economies are also expected to see a contraction in remittance payments from migrant workers abroad. Only Turkmenistan appears exempt from the international downturn, with growth remaining at a steady 12% in 2008 and 2009.

The Caucasus suffered a setback when war broke out between Georgia and Russia over the separatist South Ossetia in August 2008. The consequences for Georgia were the most severe, but Armenia's economy has also been affected, while oil exports from Azerbaijan were temporarily cut.

Kazakhstan

Visor Capital forecasts a "rapid slowdown but no crash" for the Kazakh economy. "We lower our real GDP growth forecast to 3.1% on year for 2008 from 4.9%, and to 2.5% from 6.0% for 2009 as the third-quarter results were very poor implying 1.2% on-year growth of quarterly GDP. This is a significant slowdown, given that in 2007 real GDP growth was 8.7% and 10.5% in 2006. As such, there is a risk of recession in 2009," Visor writes.

The international credit crisis affected Kazakhstan's banking sector from July 2007, since banks had borrowed heavily on international capital markets. This also resulted in the bursting of a speculative bubble in the residential property market, which has still not recovered.

Until mid-2008, it appeared the crisis would have little impact on the wider Kazakh economy. Given the country's rich endowment of natural resources, its long-term growth path seems assured. The International Monetary Fund forecasts GDP growth of 113% between 2007 and 2013.

However, when the international crisis deepened after Lehman Brother's collapse in September, Kazakhstan started to suffer from falling prices for oil and other commodities, which account for the bulk of its exports. Kazakhstan's metals and mining companies have started to stockpile production and reduce output in response to low demand and pricing.

In light of lower-than-expected revenues for the national budget, the government has been revising its three-year budget plans, basing its 2009 budget on an oil price of just $40/bbl for 2009 and $50/bbl for the next two years. Transfers from the National Fund will be increased to make up some of the shortfall. Spending cuts are expected, although the government has indicated it will maintain social spending.

The government has responded to the crisis with a package of measures directed at the banking and other sectors. The stabilization plan was approved November 25, and will be a major factor in Kazakhstan's development through 2009.

The programme's main purpose is to soften the negative socio-economic effects of the economic contraction in Kazakhstan, and ensure a basis for future economic growth. Of the KZT2.2 trillion ($18.3bn) cost of the programme, $8.3bn will come from the state budget and $10bn from the National Fund.

The National Wellbeing Fund, formed through the merger of state holding company Samruk and the Kazyna national investment fund, will play a key role in implementing the stabilization programme.

The main elements of the programme are:

* Financial sector ($4bn) - Samruk-Kazyna to buy shares and subordinated debt from Kazakhstan's largest banks. Stressed assets fund to be set up;

* Real-estate sector ($3bn) - Samruk-Kazyna to manage pension funds loaned for priority investment projects financing, purchase apartments in Astana and Almaty and make discount-rate mortgages available to homeowners;

* SMEs support ($1bn) - Samruk-Kazyna to provide funding through banks, of which 70% will go to existing projects and 30% to new projects;

* Agriculture ($1bn) - KazAgro Holding to finance 11 projects in the agriculture sector;

* Infrastructure and industrial projects ($1bn).

Renaissance Capital points out that if oil prices remain at around $40 per barrel, Kazakhstan will have a negative current account balance of $2bn. "This, coupled with limited access to (or even closure of) capital markets, would make the repayment of the $17bn or so of debt at the country's banks and corporates a challenging task," writes Renaissance Capital. "If repayments are to be supported by using foreign reserves, Kazakhstan could lose the majority of its reserves in 2009. Possible alternatives to using foreign reserves would be tenge devaluation, government borrowing (or borrowing by government-related entities) or the extension (restructuring) of foreign debt falling due next year."

The main index of the Kazakhstan Stock Exchange, the KASEShares index, fell by 65.7% from the start of the year until December 12. Meanwhile, Renaissance Capital's Rencasia index, which is dominated by Kazakh equities, has fallen by 66%.

Reform of the stock market is ongoing. 2008 saw the merger of the KASE with the special trading floor of the Regional Financial Centre of Almaty (RFCA), and the introduction of simplified listing rules for small and mid-cap companies to encourage them to float on the stock exchange. The KASE is also considering a move to T+3 settlement, rather than the T+0 that is used at present.

Early 2008 saw the diversification of the KASE, with companies from sectors including pharmaceuticals and agriculture listing for the first time. Under current market conditions, fewer IPOs are expected in the next few months at least. Following the Samruk-Kazyna merger, plans for the flotation of companies within Samruk are being drawn up.

Kazakhstan's new tax code is due to come into effect on January 1, 2009. A key element of the code is shift of tax payments from corporate to extractive industries. Corporate income tax, which is currently 20%, will be reduced to 20% in 2009, 17.5% in 2010 and 15% from 2011. The mineral extraction tax will be a percentage of revenue and tax deductable. "The MET will be referenced to realised sales prices on non-exchange traded commodities and are designed to broadly offset the drop in CIT," writes Renaissance Capital. "The MET for copper is expected to be 8.7% in 2009 rising to 9.8% in 2011. For iron ore, the rates would be 2.8% in 2009 rising to 3.5% by 2011. For chrome ore, the rates are 16.2% in 2009 rising to 17% in 2011. There will also be an as-yet-undefined revision to excess profit tax (EPT), which is designed to benefit value-added product within Kazakhstan."

With commodity prices at record high levels in early 2008, several of Kazakhstan's major metals and mining companies announced ambitious capital expenditure programmes. After its attempt to take over Kazakhmys failed, ENRC announced it would almost double its capital expansion programme from $3.6bn to $6.9bn. ArcelorMittal Temirtau planned to invest $7bn in doubling steel production by 2013.

Since then, the situation has reversed and major companies have slowed production, and put some of their operations into maintenance. In October 2008, ENRC's iron ore division (SSGPO), Kazakhmys and Arcelor Mittal signed a five-party memorandum with unions and the Kazakh government, under which they agreed to meet various social commitments including not making miners and metal workers redundant. "If implemented, we believe that this agreement will reduce the ability of miners to cut costs, and be negative for ENRC and Kazakhmys," says Visor Capital.

Falling oil prices are set to slash revenues in 2009 from 2008. "We cut our Brent forecasts by 31% to average $63 per barrel for 2009 and by 21% to $68 for 2010. We believe that the oil price will remain in the $50-80 range in the medium term, as OECD demand growth shrinks, due to the credit crunch and the lagged impact of higher prices. In the longer term, we believe that demand growth from the developing world (especially China) will continue to outstrip globally constrained supply," writes Visor Capital. The sector's profits will also be affected by the new tax code.

2008 saw agreement reached on the Kashagan oil project. Commercial production of 75,000 barrels per day (b/d) is to start in October 2013, with considerable penalties in store if the international consortium developing the project if it does not start by this date. Another important deal in the sector was the agreement between the state oil and gas companies of Kazakhstan and Azerbaijan to set up an oil transport system across the Caspian Sea. The agreement envisages tankers and barges transporting oil from Kazakhstan to the start of the Baku-Tbilisi-Ceyhan pipeline, from where oil will be delivered to Europe.

Kazakhstan's banks survived through 2008 with no bankruptcies, and have managed to meet their repayment obligations. 2009 will see a less demanding repayment schedule. Renaissance Capital writes that, "from a liquidity standpoint, the banks are overall well positioned to meet 2009 foreign debt repayments."

However, there is growing concern that some Kazakh banks may have to restructure their debts in 2009. "The stronger a bank's profile, the lower the risk of restructuring. Among Kazakhstan's largest banks, we think Halyk, Kazkommertsbank and Bank CenterCredit have sufficient liquidity and liquid assets held in foreign currency to meet next year's redemptions on their own. Weaker liquidity at BTA and Alliance Bank leaves these banks more exposed to the risk of debt restructuring, should the government move to facilitate such negotiations," says Renaissance Capital.

In November, the government had finalized terms for the injection of $3.5bn into the country's four largest banks - Halyk, BTA, Alliance and KKB. It is not yet clear how the remaining $1.5bn earmarked for the sector will be spent. After Kazakhstan's number five and six banks - BankCenterCredit and ATF Bank - turned down the government offer, it may be invested into other top-10 banks.

There are various risks for the sector to face in 2009. In their annual financial stability report issued in December, the National Bank of Kazakhstan and the financial regulator AFN have identified the key risks as: increasing credit risk; higher provisioning levels; and, pressure on profitability due to slower economic growth and worsening company financial conditions while, combined with the banks' limited capacity to optimise costs, will require higher capitalisation levels.

Visor Capital warns that, "Oil companies may have significantly lower funds available to put into corporate deposits in Kazakhstan due to lower oil prices and higher tax burden." Other commodities producers are also expected to generate lower revenues in 2009.

2008 saw several investments by foreign banks into Kazakhstan. These include Kookmin Bank's investment in Bank CenterCredit, VTB setting up of a representative office, and Raiffeisen International's announcement that it plans to set up in a Kazakhstan subsidiary (though it has not yet done so). On the investment banking side, Russia's Troika Dialog entered the Kazakhstan market.

The Majilis (parliament) has approved the draft law on Islamic finance. If adopted, the law could help banks find an alternative to traditional finance.

Around $100bn of infrastructure investments have been proposed in Kazakhstan. Funding may, of course, become more difficult under current market conditions.

Up to $5.2bn may be spent on upgrading Kazakhstan's road infrastructure. Kazakhstan is already in negotiations with the World Bank and four other international banks to borrow $3.45bn to finance the construction of a section of the Western Europe-Western China highway. Investment in the rail sector, to further Kazakhstan's ambitions of becoming a transit route between Europe and China, are also in progress. The government has been keen to encourage private sector investment in road and rail projects.

Construction of the $Caspian Energy Hub at Aktau is due to start next year. The massive $10bn project is being carried out by Gulf Finance House (GFH), PFC Energy International, Mangistau investment company and Dunie Stock Energy, as well as Samruk-Kazyna, under an agreement signed in spring 2008. Another mega-project, the $20bn G4-City, a plan to build four satellite cities outside Almaty, is also starting. There is also urgent need for investment in electricity generation, transmission and distribution infrastructure.

Prices for residential real estate continued to decline in late 2008 in Almaty and other major cities, according to National Statistical Agency. In November, residential real estate prices in Almaty on the secondary (re-sale) market declined 3.1% on month to $1,812 per square metre (sqm), while new residential real estate in Almaty declined 2.4% to $2,301 per sqm.

Financial regulator AFN and the National Bank of Kazakhstan said in their annual financial stability report that they do not anticipate a recovery in real estate prices before the end of 2009.

Renaissance Capital writes that, "Low price levels make it unfavourable for banks to sell real estate held as collateral due to a risk of losses. Current economic trends and the tighter credit environment will continue to keep the demand side under pressure."

Uzbekistan

The EBRD forecasts that Uzbekistan will achieve 7% GDP in 2009, slightly down from 8% in 2008. Performance will be affected by world prices for gold, gas and cotton. The international downturn could also delay the part privatisation of assets, including coal miner Uzbekugol, Uzbekistan Airways and Asaka Bank, to foreign strategic investors. The Uzbekugol tender process has already been extended until 2009. FDI has, however, continued to increase in 2008, especially in the oil and gas sector, with Lukoil, Petronas, CNPC and Korea National Oil Corp. all planning investments. Outside the natural resources sector, the government aims to stimulate a range of sectors through securities market reforms, new laws on insurance, and tax cuts for entrepreneurs.

Kyrgyzstan

Kyrgyzstan's government revised its GDP growth forecast for 2008 from 8-8.2% down to 6-7% in mid-2008. Next year, the IMF forecasts a further slowing in GDP growth and a widening of the current account deficit, due to spill-over effects from the international crisis and higher energy imports. The government's 2008-2009 economic programme aims to reduce inflation to 10% by end-2009, sustain economic growth and protect the poor. The privatization process has been simplified under a new law adopted in early 2008. In the near future, the united share holdings of Severlectro, Bishkekteploset and the Bishkek heating power station's property complex are to be sold off for $450m. Meanwhile, Russian companies are playing a larger role in the economy, as President Kurmanbek Bakiyev looks to Moscow for support. Renova Group and the Eurasian Development Bank have signed a deal with the government to develop Kyrgyzstan's mining sector.

Turkmenistan

2008 saw the first independent audit of Turkmenistan's oil and gas reserves, confirming the existence of "super giant" fields. "The independent appraisal of Turkmenistan's reserves is crucial for the country as it eliminates concerns over the presence of sizable reserves [that prevented] significant flow of investment," writes Renaissance Capital. Turkmenistan plans to increase gas production to 150bn cubic metres by 2030, which will require investments of $8bn-9bn. A new hydrocarbons law approved in September is expected to improve conditions for foreign investors. Government moves to open up economically and politically - including through the adoption of a new constitution - are small but widely perceived as investor friendly.

Tajikistan

Tajikistan saw a slowdown in GDP growth in the first half of 2008 caused by the exceptionally harsh 2007-08 winter, which brought the country to a standstill and also contributed to this year's disappointing cotton harvest. According to the State Committee for Statistics, Tajikistan was the only CIS state to see a decline in industrial production in the first 11 months of 2008. Tajikistan receives remittances from its migrant workers amounting to around 36% of GDP; as the Russian economy slows sharply, these payments are expected to fall. According to the EBRD, growth will be 5% in 2008 and 6% in 2009. The 2009 state budget is dominated by investments in infrastructure projects and the development of the real sector of the economy, which together account for over 50% of spending.

Azerbaijan

Azerbaijan was the world's fastest growing economy in 2007 and continued to show the highest growth in the CIS in 2008 (17%, says the EBRD). In 2009, this is set to slow slightly to 15%. Azerbaijan was also the top reformer according to the World Bank's "Ease of Doing Business" index published in September 2008. The biggest concern for 2009 is the effect of low international oil prices, since its economy is highly dependent on the oil sector. In mid-December, Azerbaijan announced it would cut production by around one-third in support of Opec's decision to cut output. However, government officials have said they will not revise their 2009 budget - which was drawn up based on an oil price of $70 per barrel - despite the fact that prices were hovering around $40 as of December.

Georgia

Georgia is still struggling with the consequences of its five-day war with Russia in August. The opposition has become increasingly vocal in its criticism of President Mikheil Saakashvili for taking Georgia into a war it could not hope to win. In October, the government cut its 2008 GDP growth outlook to just 3.5% for the year (after 8.5% growth in the first half). Its forecast for 2009 is 2-3%. This was despite the $4.55bn pledged by international donors to help Georgia's recovery. Despite the difficulties, there have been some large investments into Georgia in recent months, including UAE-based RAK Investment Authority's purchase of a 49% equity interest in Poti Sea Port and Czech ENERGO-PRO Group's acquisition of Kakheti Electricity Distribution, while international banks including Societe Generale and Kazakhstan's Halyk have expansion plans for 2009.

Armenia

Growth in Armenia is set to fall slightly from 10% in 2008 to 8.3% in 2009, the EBRD forecasts. Its 2009 budget is based on a projection of 9.2% GDP growth. Armenia is likely to face difficulties in 2009 due to falling prices for metals - its main exports - on world markets, and a drop in remittances from migrant workers. Residential real estate prices have already started to fall after seven years of continuous growth. Armenia has also been affected by fallout from the war in Georgia. However, 2008 has seen a small improvement in Armenia's relations with its neighbours. For the first time in 18 years, the presidents of Armenia and Azerbaijan signed a document on working towards peace in Nagorno-Karabakh - although the Russian-brokered agreement is more symbolism than substance. There has also been an increase in dialogue between Armenia and Turkey.

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