High vulnerability to global economic cycle and external shocks

A lack of economic diversification makes Kazakhstan’s economy highly vulnerable to global demand for and prices of commodities, especially of oil and gas. Economic growth has been volatile and modest over the past decade, recording an average annual of just +2.8%. After contracting by -2.6% in 2020, real GDP expanded by +4.1% in 2021, +3.2% in 2022 and around +5% in 2023. The external sector was the main growth driver, benefiting from surging global oil and gas prices and, in 2021, rapid growth in China (Kazakhstan’s main export destination). China’s revocation of its zero-Covid policy in end-2022 supported again Kazakh growth in 2023. Looking ahead, we forecast average annual real GDP growth to remain above +4% in 2024-2025.

Currency and inflationary risks remain on the cards. Since the massive devaluation of the Kazakh tenge (KZT) in 2014 and the subsequent shift to a floating exchange rate regime, the currency has depreciated by an average annual -14% in 2014- 2022, though it stabilized in 2023. The KZT is particularly vulnerable to external shocks such as the global oil price slumps in 2015-2016 and 2020 or the Covid-19 pandemic. Strong exchange-rate movements also feed through to inflation. The latter rose to an average of 15% in 2022-2023 owing to increased energy and food prices as well as supply disruptions. Inflation has only gradually come down to 9.8% at end-2023 and we forecast it to remain elevated in the next two years.

The business environment in Kazakhstan has weakened in recent years and is now slightly below average in our assessment of 185 economies. The Heritage Foundation’s 2023 Index of Economic Freedom survey assigns Kazakhstan rank 71 out of more than 180 countries, down from rank 34 two years earlier. The significant worsening reflects deteriorated property rights, judicial effectiveness, business freedom and labor freedom while government integrity has remained weak. Moreover, the World Bank Institute’s annual Worldwide Governance Indicators surveys continue to indicate considerable weaknesses with regard to regulatory quality and, in particular, the rule of law and control of corruption. Our proprietary Environmental Sustainability Index ranks Kazakhstan only 140th out of 210 economies, reflecting serious weaknesses regarding renewable electricity output and the recycling rate.

Systemic political risk in Kazakhstan is high. The political regime is considered an autocracy with weak institutional effectiveness. In response to violent social unrest in January 2022, President Tokayev began reforms that aim at curbing presidential powers and delegating more powers to parliament, as well as making the registration of political parties easier in an attempt to improve pluralism. The reforms have the potential to significantly improve the political environment in Kazakhstan. However, progress on the reforms is likely to be slow, not least because of potential opposition from political elites. Moreover, mismanagement or slow advancement of the reforms could spark renewed social unrest, in particular if the economic situation worsens. Overall, the risks to political stability will remain high in Kazakhstan over the medium term.