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The National Bank of Kazakhstan’s (NBK) recent monetary normalization–which upped the refinancing rate for the first time in eighteen months by 50 points to 7.5% in March, a move it will probably repeat in Q2 though when considering Kazakhstan always watch to first see what the Russians do)–along with hawkish comments from chairman Grigoriy Marchenko that “it could raise the full-year inflation forecast” for 2011 from the current 6-8% range, signal a fairly compelling case for further tenge (KZT) appreciation against the dollar (a trade expressed via NDFs) despite some $5.5.bn in intervention designed to offset foreign capital inflows tied to the country’s net oil exports of 1.5 mb/d that have pushed the 12m rolling current account balance well into surplus. While the NBK is mindful of rapid appreciation, said concern lies (rightfully) secondary in our view to inflation which, as myriad EM (like Russia!) bank governors worldwide can attest, may be one reason to let domestic currency purchasing power ascend. Consumer prices in Kazakhstan rose 7.8% last year, compared with 6.2% in 2009, on the back of food prices–which spiked following a poor summer grain harvest–recent fuel price increases, and strengthening consumer demand (retail sales jumped 12.3% last year as gains stemming from robust industrial production numbers–up 10%y/y– passed through to wages) underpinned in part by the state’s social programs. Aggressive intervention would only serve to exacerbate these inflationary trends, undermine the (recently re-elected) President’s mandated budgetary largesse from several months earlier and overall run contrary with the Balassa-Samuelson thesis. Finally, as some observers have noted KZT strength only encourages further de-dollarization, a necessary step in the IMF’s eyes towards achieving domestic capital market maturation.
Against the backdrop of rising global uranium consumption fueled by in part by growing developing market demand (founded on the pragmatic approach of delivering relatively eco-friendly power on an adequate scale) and projected by the World Nuclear Association to reach 91,537 tons by 2020 and 106,128 tons by 2030 (increases of 33 and 55 percent respectively from last year), Vladimir Shkolnik, chief executive of Kazatomprom (fully-owned by the domestic sovereign wealth fund Samruk-Kazyna) announced at the beginning of the month an expected 10 percent increase in uranium production this year.” Per Reuters Kazakhstan (the world’s leading producer with an expected market share of 30%) holds more than 15 percent of global uranium reserves and says that it could raise production to more than 25,000 tons (from a planned 19,600 post-increase) by 2015–placing it only behind Australia in terms of known reserves. Meanwhile, in the past year swap prices have risen from $41.50 to $73.00 and per underlying dynamics such as Russia’s wont to let the HEU accord expire and a 20% increase (at least half of which will come from China) in the number of reactors built worldwide, “prices could increase significantly” per market leader Cameco, especially if oil prices indeed climb as some anticipate. Moreover, per Felix Zulauf, head of Zulauf Asset Management in the latest Barron’s roundtable, the upward price pressure could be somewhat secular rather than cyclical in nature: “uranium production is growing, but slowly. Annual production . . . meets only 60% of demand; the rest is met from utility stockpiles or decommissioned nuclear weapons. Production will increase over time, but it could take 10 years or more until it is sufficient to meet demand.” The recent price ramp-up has obviously attracted attention: analysts note that for the first time in almost four years, the spot and term prices trade at parity and that in January alone, the spot price increased US$10.50/lb, the largest monthly increase since June of 2007, while the term price jumped US$8/lb, its largest single move since June 2008.
Yesterday we relayed Imara Asset Management CEO John Legat’s theory that a flat tax rate would be a boon for Zimbabwe and ultimately erode corruption while underpinning the country’s competitiveness (against the likes of South Africa, for instance) and moreover augment its moribund tax base. The Economist’s latest piece on business and bureacracy (“Snipping of the shackles”) touches upon some of these same themes, noting [in regards to the World Bank’s latest “(Ease of) Doing Business Survey 2011”] that “wherever the red tape is thickest, the result is widespread informality. Many small firms operate under the radar of officialdom, dodging taxes and ignoring rules [in order] to survive. But they have to stay small, and thus contribute much less than they might otherwise do to a country’s prosperity.” Cutting said tape, the theory goes, propels a positive feedback loop that–given how low a base some countries are coming from–can quickly translate into fairly remarkable results. The state of Lagos for example, home of Nigeria’s business capital by the same name, “has been improving its tax collection . . . encouraging formerly chaotic companies to keep proper accounts, which in turn makes it easier for them to do business with each other. The extra tax revenue is being used to improve services such as public transport, which among other benefits makes it a better place to do business.” Among other countries making recent gains in the rankings, Mexico (“the most straightforward country in Latin America”) and Kazakhstan (year’s most improved economy) were frontier stand outs.
Another, Saudi Arabia, is ranked higher than both Germany and Japan, which might cause some cynics to question the data’s veracity. On a similar note we switch gears to a project recently published by two MIT economists which used the internet to provide a daily gauge of consumer price inflation (see graph, inset) among various countries and which also calls into question the rosey conclusions offered up by some governments–namely Argentina’s:
“In countries where the apparatus for collecting prices is limited, or where officials have manipulated inflation data, the economists’ indexes might give a clearer view. In Argentina, for example, the government has been widely accused of massaging price figures to let it pay less interest to holders of inflation-indexed bonds. President Cristina Fernández has defended the government data. For September, the government’s measure of prices rose 11.1% from a year earlier. The economists’ measure in that period: up 19.7%.”
Citigroup Global Markets strategist Andrew Howell was on Bloomberg this past week discussing investing in frontier markets. Howell highlights Kazahkstan in particular as exemplifying the broader frontier story: relatively low valuations despite abundant resources and low debt, with (thus far) a smoother return and less risk correlation than developed indices or the BRICs, despite the fact that most frontiers in general rely on said economies for the bulk of their trade and capital flows. Howell concludes that frontier markets, which trade at 13.1x earnings, are not “stretched” relative to other emerging markets that trade above 20x earnings. As to a less commodity driven market such as Croatia, Howell points to financial services as a sector to watch, given the imment rise of credit. That said, a genuine global recovery is still the impetus for such growth, Howell admits, and any “double dip” among more developed markets will also tend to implicate its less liquid brethren. On the subject of Croatia, for instance, Roubini Global Economics predicts that “sluggish credit growth to the private sector will prolong recovery.”
Shrinkage in the tenge?
The Kazakhstani tenge, or KZT, the currency of Kazakhstan, is affectionately known by London traders as the ‘Borat’, according to Macro Man, a local punter. Wednesday, the Kazakh central bank decided to allow the tenge to drop by roughly one-fifth, in a devaluation it alleged was triggered by falling world oil prices (which are some 60% of Kazakhstan’s foreign exchange income) and the sharp depreciation of the Russian ruble which decreased the competitiveness of its Kazakh produced goods. Hitherto, the bank had used approximately $6bn of its foreign exchange reserves since October defending the tenge, including $2.7bn in January alone, according to the Financial Times. The situation can be contrasted with that of the ruble, which has fallen by one-third against the dollar since last summer, but which is still being defended by Russia’s central bank, to the chagrin and surprise of some who lament the wasting of reserves against what might be considered the currency’s inevitable decline. The ‘Borat’ will now be allowed to fluctuate by about 3% around a new level of 150 against the dollar, a level which Katya Malofeeva, chief economist at Renaissance Capital in Moscow, guessed it should be able to hold.
Per Macro Man, the fall from grace has tarnished yet another ‘sexy long’:
“Yet another emerging market currency has been splattered today, as the Kazakh tenge has finally been devalued by 20% after months of pressure. The KZT was in vogue a couple of years ago as a sexy long, but another one of Macro Man’s rules of thumb is never to trade a currency named after a movie character. The pressure on the KZT has been mirrored in “real” markets, where the (Central and Eastern European) currencies such as HUF and PLN have been obliterated in the past few days, with market liquidity collapsing. So the Great Unwind has further to go.”
So what will bring sexy back in 2009? Anything?
Traders of credit-default swaps last month ranked Kazakhstan’s banks as the most prone to default in emerging markets, based on the cost of contracts on BTA Bank and AO Kazkommertsbank, the central Asian nation’s biggest lenders. However, today the cost to protect against a default by Kazakhstan fell by a record after the government said it will buy stakes in the nation’s biggest lenders to boost liquidity in the banking system. Credit-default swaps based on Kazakhstan dropped to 5.1 percent of the debt insured from 7 percent.
Last month, RBC Capital Markets analysts had grouped Kazakhstan with Latvia as the most at risk among developing countries worldwide from the credit crisis, as a reliance on short-term foreign borrowing made it a “canary in the coal mine.” But that prognostication may have always been suspect given the country’s vast oil wealth. In contrast with Iceland or Ukraine, for example, which had to be rescued by the IMF, Kazakhstan has $49.5 billion of reserves, including $27.6 billion in the National Oil Fund created eight years ago to guard against a drop in crude. And its Prime Minister Karim Masimov said in an interview last month that leaders would spend as much as $15 billion to spur growth and prevent any bank failure.
Meanwhile today, crude oil prices jumped to a two-week high, and given the recent OPEC cuts, may be there to stay?
If all you knew about Kazakhstan stemmed from “Borat,” you’d likely be skeptical about the country’s growing status as an emerging, frontier market. After all, the only thing the movie’s protagonist seemed truly proud of concerning his homeland was his older sister Natalya’s status as “number four best prostitute.” Charming. But now, writes Bruce Pannier, “more than a decade and a half after the Soviet Union collapsed, Kazakhstan is emerging as a regional power in at least several areas. The money from its oil industry, just now starting to produce in large quantities, gives Astana the kind of revenues that its Central Asian neighbors can hardly imagine. Its banks are among the region’s pioneers in tapping foreign stock markets. [And] Kazakhstan is also investing in other countries in Europe and Asia, but also closer to home in Kyrgyzstan and Tajikistan, where Kazakh companies own shares in banks and various industries.” Thus, while Kazakhstan still needs and solicits large-scale FDI for its own needs, including transport, pipelines and energy infrastructure, the Central Asian nation has started buying into foreign energy-related ventures.
“Borat” jokes aside, many experts echo Pannier’s words and now describe the sprawling country as one of the most mature economies in Central Asia, and a stable nuclear partner. In fact, Greg Vojack, a managing partner with law firm Bracewell & Giuliani in Kazakhstan, opined that Kazakh companies are “coming of age and expanding globally.” The key to the relatively sudden boom thus far can be summed up neatly: Uranium. Kazakhstan contains the world’s second-largest uranium reserves, estimated at 1.5 million tons, and is the world’s No. 3 uranium miner, exceeded only by Australia and Canada (the three countries account for more than half of global uranium production). In 2006, uranium production increased 21 percent, and in 2007 that rate accelerated over 30 percent to roughly 7,000 tons, according to the country’s Energy and Mineral Resources Ministry. Most analysts now predict that Kazakhstan will soon become as vital a contributor to the global uranium market as it is in oil. And while uranium prices have increased over 1,000 percent since 2001 to over $100 a pound (specifically, demand and extended weather-related closures at key uranium mines in Australia and Canada tripled uranium prices in the past year to about $120 a pound), there is not necessarily any immediate ceiling. Australia’s Macquarie Bank’s stock-broking division, for example, projects that by 2009 uranium prices will rise to $200 a pound. Driving uranium prices upward are record-high oil prices and rising demand for the fuel, particularly from Asia. South Korea relies on nuclear energy to produce 45 percent of the country’s electricity, and Japan is not far behind, relying on nuclear power for 30 percent of its energy needs.
China and India are also quite keen on nuclear energy. China’s Commission of Science Technology and Industry for National Defense has stated that China will “prospect for and develop indigenous uranium deposits in order to expand the nation’s ability to produce 40 gigawatts of nuclear power electrical generating capacity by 2020.” China is also developing a national uranium reserve to commence in 2010. A UPI wire story from August 2007 noted as well that “nuclear power accounts for just 1.4 percent of China’s electrical power generation,” and that “despite Beijing’s ambitious attempts to expand uranium production in Xinjiang and elsewhere, local sources will be insufficient to meet domestic needs; analysts predict that within less than a decade China’s planned nuclear power reactors will consume 44 million pounds of uranium annually, as more than 16 provinces, regions and municipalities have announced intentions to build nuclear power plants within the next eight years–a total of 77 planned and proposed new reactors.” As for India, nuclear power accounts for roughly 3-4 percent of the country’s power needs, and the government has 19 planned and proposed nuclear power reactors.
In 2002, Kazakhstan became the first of the former Soviet states to receive investment-level credit rating, and has been courting foreign investment ever since, especially in regards to mining. The world’s leading producer of uranium oxide, Canada’s Cameco, has a 60-percent share in Kazakhstan’s Inkai uranium mining operation, while the state run energy firm, Kazatomprom, the world’s fourth-largest producer, also has a stake in Inkai. Founded in 1997, Kazatomprom reported assets of $1.6 billion in 2006, and last year announced plans to increase its uranium output sixfold to 18,000 tons per year by 2012.
Kazakhstan has also done a commendable job of keeping the great big bear (Russia) at bay. ” As with its oil and gas reserves,” the UPI noted, “Kazakhstan has adroitly maneuvered to lessen its dependency on Russia by diversifying its partners and markets.” Specifically, in April 2005 South Korea and Kazakhstan established a joint mining venture for uranium, (with operations set to commence this year) with an projected annual output of 1,000 tons. And one year later Kazakhstan and Japan signed a civil nuclear cooperation agreement under which Japan was to import 30 percent of annual uranium needs of 9,500 tons for power generation from Kazakhstan. Other foreign companies investing in Kazakhstan’s uranium industry include Canada’s SXR Uranium One Inc., Japan’s Marubeni Corp., China’s Guangdong Nuclear Power Group, Britain’s New Power Systems Ltd. and the U.S. uranium trading company Nukem. These deals are “a way to shore up partners other than Russia for [Kazakhstan] nuclear-related industry,” observes Vojack.
How to play Kazakhstan from the comforts of your own home? How about with what Winston Kotzan describes as “the Borat trade”?
JGW
Frontier Markets 