Central Asia: Is Now The Time To Invest In Kazakhstan?

Global investors tend to group Kazakhstan along with Russia and the Commonwealth of Independent States (CIS), but its market fundamentals are markedly different and they appear to offer some interesting investment opportunities going into 2020

Photo: unsplash.com/Beka Tasmagambet

First and foremost, the government has been pursuing a privatization program that aims to raise $7 billion by selling stakes in around 900 companies. The world’s largest landlocked country is taking a page from the playbook of Margaret Thatcher, the U.K.’s former prime minister, who saw privatization as “fundamental to improving Britain’s economic performance”

Meanwhile, the countries of Central Asia are in talks to create something along the same lines as ASEAN, the Nordic Council, the Visegrád Group for Central European states or Mercosur for South America. On November 29, Kazakhstan’s First President Nursultan Nazarbayev joined with the leaders of Tajikistan, Turkmenistan and the Kyrgyz Republic to declare that they would work toward joint development and cooperation in areas that range from economic trade and investment to infrastructure, tourism, science and culture. Positive developments like these are winning plaudits.

Kazakhstan jumped eight positions to reach No. 28 in the World Bank Group's Doing Business 2019 report that ranks the world's top economies for their ease of doing business. Kazakhstan’s ranking places it ahead of No. 30 Spain, No. 46 China and No. 77 India.

And Kazakhstan isn’t alone. Neighboring Uzbekistan, which is ranked No. 76 in the same rankings and has recently opened up for foreign investment, looks set to spur a “healthy rivalry” in Central Asia that will potentially boost the economy of Kazakhstan, according to the International Monetary Fund. The competition will make both countries policymakers work harder to further improve transparency, their policy frameworks and business environment.

The recently held Almaty Investment Forum aimed to firmly position Almaty and Kazakhstan as the center of Central Asia’s economic development. Kazakhstan's policymaker hope to make the country’s largest city, Almaty, into a significant transport, logistics and tourism hub on the new Silk Road. This year’s forum saw 31 agreements worth $2.3 billion signed between various government agencies and the business community in late November.

Global air connectivity will be ever more important for Central Asia and as such the Turkish airport operator TAV submitted a non-binding bid to buy Kazakhstan's Almaty airport in a joint venture with Goldman Sachs International. TAV plans to invest $165 million in Almaty International Airport in the coming years. The investment will significantly increase the capabilities of the airport, adding one million additional passengers and creating 3,000 jobs.

Global food giant Tyson Foods has announced an investment to produce beef in Kazakhstan, which shares a border with China. Chinese tariffs on Kazakh meat are 12%. The U.S. is the world’s largest beef producer, but sales to China have been disadvantaged since Beijing imposed a 25% retaliatory tariff, bringing the total levy to 37%.

Although the economy is expected to grow another 3.4% in 2020, according to a forecast from the Economist Intelligence Unit, many investors still overlook Kazakhstan’s solid investment fundamentals due to its credit ratings. The country's long-term foreign debt rating was affirmed by Moody's in August at Baa3, the lowest investment grade score. Foreign Issuer Rating was affirmed by Moody's at Baa3, the lowest investment grade score.

The project that is probably having the greatest impact in shifting global investor perception has been the Astana International Financial Centre (AIFC). Established on July 5, 2018, the AIFC is a financial hub based in Kazakhstan’s capital Nur-Sultan City for the countries of Central Asia, the Caucasus and the Eurasian Economic Union (EAEU).

The AIFC also aims to be a financing platform for the “Belt and Road” initiative. The AIFC already has partnerships with the Shanghai Stock Exchange and NASDAQ in place and seeks to incentivize participants by exempting them from corporate taxes for the income received from providing financial and ancillary services as well as from capital gains until 2066. Furthermore, their employees will also be similarly exempted from individual income tax.

Kazakhstan also plans to offer investment residency status to foreigners investing at least $60,000 into equities at the Astana International Financial Center’s stock exchange, the center's governor, Kairat Kelimbetov told Bloomberg News recently. Investors will be guaranteed a five-year multi-entry visa. The measure, aimed at nationals from the former Soviet Union republics and Middle East, is expected to raise KZT100b (over $250 million) within the five years of the start of the program.

Kazakhstan’s real interest rates are expected to remain relatively attractive in the near term with the National Bank of Kazakhstan’s base rate at 9.25%, and an expected slowdown in inflation to the mid-range of the 4% to 6% target corridor throughout 2020.

Kazakhstan is certainly a value investment at the moment. KASE (Kazakhstan Stock Exchange) trades at a price-earnings ratio of 6.44, a dividend yield of 3.73% and a Price-to-book of 0.9. In comparison, the MSCI World Equities Index trades at a P/E ratio of 20.04 and the MSCI Emerging Markets Index trades at P/E ratio of 14.67.

The largest bank in the country, Halyk Bank, is a case in point. Operating in a growing economy of 18.8 million people with an under-penetrated banking sector and an return on assets (ROA) 5-year average of 24.9% and a cost-income ratio of 29.6%. This compares with the Western European banking sector’s ROA of 7.3% and a European Bank average C/I of 6.5%, according to S&P Global Market Intelligence.

Halyk Bank is the true definition of a value stock as it pays investors a 8.29% dividend in U.S. dollars and the 1 year dividend growth is 49.4%, according to Bloomberg data, while the stock trades at a P/E ratio of 4.76. To put things in perspective, according to Bloomberg data, of all U.S. dollar denominated stocks globally, only 0.21% pay a dividend yield of 8% or more in dollars.

In early December, FITCH Ratings upgraded Halyk Bank to to "BB+" from "BB" with a Positive outlook, citing Halyk Bank's dominant market shares and resulting superior pricing power, its conservative risk appetite and management, and favorable asset structure. In Fitch's view, Halyk's solid capital and liquidity buffers and its impressive through-the-cycle performance should help the bank to successfully mitigate even quite extreme swings in the operating environment.

Given the late stage economic cycle of the operating environment of companies in the EU, China and even the U.S. market, investors are increasingly looking for less correlated markets.

Central Asia closer cooperation and the Belt and Road initiative coupled with low base effect could lead to more global investor interest in Kazakhstan in 2020.

Rainer Michael Preiss, Contributor
 
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