Kazakhstan

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S March 25, 2008

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E-mail : rolf.danielsen@seb.se

The overheating warned against a year ago has come home to roost as seen in soaring inflation. At
the same time credit financed spending is slowing rapidly as banks slam the brakes on unsustainable
lending growth after feeling the pinch of global credit crunch.
Country Risk Analysis
bñÅÉääÉåí=ÖêçïíÜ=ÅçãÉë=íç=~å=ÉåÇK===IoIIoving severaI years of doubIe digil grovll,
economic aclivily sIoved in Iale of 2007 Ieaving lolaI economic expansion al Iess llan
9° for lle year. Afler rapid credil grovll from domeslic banIs reacling 75° p.a. in
lle firsl laIf of
2007, banIs lave
nov sIammed
lle breaIs on
furller credil
expansion as a
main source of
lleir funding,
foreign marIels,
dried up
foIIoving lle
sub-prime
debacIe in lle
US. As a resuIl
aclivily in lle
conslruclion
seclor las
sIoved so mucl
llal lle
governmenl Iale
2007 promised speciaI assislance for lle buiIding companies lo enabIe llem lo finisl
on-going vorIs. AIso consumer spending las become sIuggisl. In 2008, grovll is
IiIeIy lo conlinue sIoving significanlIy according lo mosl observers.
Domestic bank lending
Claims to Households Claims to Private Nonfinancial Institutions
Source: Reuters EcoWin
2002 2003 2004 2005 2006 2007
K
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b
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0
1
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4
5
Corporates
Households

qÜÉ=ÉñíÉêå~ä=Ä~ä~åÅÉ=ïÉ~âÉåë. Despile lle end-year cooIing, imporl demand ended
aImosl 30° up on 2006. Tlal senl lle currenl accounl baIance inlo a deficil of
3,6°/GDI despile leaIlly exporl grovll. Tle Ialler refIecled soaring oiI prices and
rising crude exporls, vlicl represenl more llan 60° of lolaI merclandise exporls.
Tlal, logeller vill lle caII on lle cenlraI banI lo supporl lle exclange rale of lle
lenge (IocaI currency) by lle saIe of foreign exclange vorll more llan $5 biII. in
Seplember and Oclober, prevenled furller buiIding of reserves. In lle evenl lley
ended lle year $2 biII. Iover al $15 biII. equivaIenl lo 4-5 monlls of imporl cover.
Tle silualion vouId lave been vorse sliII bul for Iarge IDI (foreign direcl
SEB Merchant Banking Country Risk Analysis March 25, 2008
inveslmenl) fIovs lo a record $8 biII. llrougl lle firsl 9 monlls of lle year, lo vlicl
one can add al Ieasl $2.2 biII. from a foreign inveslor for lle acquisilion of ATI, a
major KazaIl banI in November. Hovever, as banIs vere prevenled from
increasing lleir foreign borroving mucl furller, lle ralio of lolaI debl lo GDI
improved sIigllIy from 96° lo 91°. Tlal is sliII ligl by any measure bul a Iarge parl
of represenls inler-company Ioans reIaled lo lle deveIopmenl of KazaIlslan's oiI and
gas seclors. Tlose are IiIeIy lo slay profilabIe and abIe lo service lleir Ioans even in
vorsl case scenarios. AIso vorll Ieeping in mind is llal in addilion lo Iiquid foreign
reserves leId by lle cenlraI banI, lle governmenl las even Iarger foreign reserves in
lle NalionaI Iund of lle RepubIic of KazaIlslan (NIRK) vlicl aulomalicaIIy
receives a cerlain percenlage of oiI exporl revenues. Al end 2007, lle fund slood al
$21 biII.

`çåëìãÉê=éêáÅÉ=áåÑä~íáçå=~ÅÅÉäÉê~íÉëK Al lle same lime annuaI price infIalion
acceIeraled lo aImosl 18° in Iale 2007 spurred by ligler inlernalionaI prices of food
sluff bul aIso by 20-30° vage liIes for pubIic seclor empIoyees since lle beginning
of lle year driving vage demands in lle vloIe economy. Tlal las Iefl lle cenlraI
banI in a diIemma laving lo figll run-avay prices vliIe demand grovll veaIens
for reasons of ils ovn. So far il las raised inleresl rales lo 11° from 9°, sliII Ieaving
llem vays beIov
lle on-going rale
of infIalion,
lovever.

cáëÅ~ä=éçäáÅáÉë=
É~ëÉ.
KazaIlslan's fiscaI
poIicy slance las
been generaIIy
slrong vill a
budgel surpIus
reacling 7,4° in
2006 boosled by
ligl oiI prices. In
2007, lovever, lle
governmenl
aIIoved lle
surpIus lo laIve
nolvillslanding
conlinuousIy rising oiI prices, as il impIemenled severaI lax culs: VAT vas reduced
by 2 percenlage poinls and a personaI income lax on vages and saIaries vere
reduced significanlIy as lle governmenl repIaced a progressive lax code vill a singIe
fIal lax rale of 10 percenl on aII income above a cerlain llresloId. On lle expendilure
side lle governmenl gave pubIic seclor empIoyees a raise of some 20-30°. As a resuIl
lle budgel surpIus feII lo an eslimaled 3,3°/GDI. Tle main probIem vill llis
clange of poIicies vas lle exlra slimuIus lo lle economy. Tlis may easiIy be bIamed
for mucl of lle overlealing in lle firsl parl of 2007 and lle subsequenl infIalionary
impacl. IinanciaIIy, lovever, lle governmenl's posilion remains as slrong as ever.
Governmenl debl lo GDI is veII beIov 10° and is aII domeslic. Iasl year lle
governmenl repaid lle Iasl lrancle of ils smaII oulslanding foreign issue.
Inflation
ar 12 months
Source: Reuters EcoWin
2002 2003 2004 2005 2006 2007
P
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5
10
15
20

mçäáíáÅ~ä=äáÑÉ=å~êêçïë=íç=çåÉ=éÉêëçå. Al generaI eIeclion in 2006 lle incumbenl, Mr.
Nazarbayev von a resounding viclory as none of lle opposilion parlies vere abIe lo
2

SEB Merchant Banking Country Risk Analysis March 25, 2008
pass lle nev and ligler llresloId Iimil of 7° of lle voles. As a resuIl lle presidenl
las nov fuII conlroI over officiaI poIilicaI Iife llrougl lis Nur Olan (IallerIand)
parly. As a resuIl le couId unclaIIenged asI for lle Conslilulion lo be amended lo
aIIov lim run for office muIlipIe limes villoul Iimil. Mr. Nazarvayev, aged 67, is
nov expecled lo ruIe for a Iifelime crovning a Iong poIilicaI career. Il slarled as
communisl parly boss in lle Iale 1980s under soviel ruIe and exlended inlo lle 1990s
as Iresidenl laving been eIecled in a slring of eIeclions vlicl lave nol been
regarded as free and fare by mosl foreign observers. His fev remaining poIilicaI
opponenls are nov apparenlIy eiller siIenced or exiIed as Mr. AIIiev, lis son÷in-Iav
and a media-magnale vlo unliI Iasl year ovned one of lle fev remaining free radio
clanneIs.

pÜçêí=íç=ãÉÇáìã=íÉêã=éçäáíáÅ~ä=ëí~Äáäáíó: Sucl an arrangemenl may guaranlee ligl
degree of poIilicaI slabiIily al Ieasl in lle slorl lo medium lerm. In lle Ionger lerm il
raises lle queslion of succession slouId lle Iresidenl be incapacilaled or die. His
mosl IiIeIy successor is lis daugller, Dariga Nazarbayev, vlo Iasl year divorced ler
lusband foIIoving lis faII in disgrace.

k~íìê~ä=êÉëçìêÅÉë: IoIIoving major oiI finds in lle 1990s incIuding lle Iarge
Kaslagan
fieId, lle
vorId'
Iargesl
oulside lle
MiddIe Lasl,
KazaIlslan
is naluraIIy
associaled
vill lle
forlunes of
lle oiI
marIel.
TolaI
reserves are
eslimaled lo
some 38 biII.
barreIs of
vlicl as
mucl as a
llird may be commerciaIIy expIoilabIe. Tlal maIes lle counlry one of lle Iargesl oiI-
counlries oulside OILC, nol far belind Russia. Iroduclion las aIready passed 1
mbpd (miII. BarreIs per day) and is rising rapidIy. Tle aim is been lo reacl 3 mbpd,
bul llis goaI may nol been villin reacl before 2015 al lle earIiesl. Tle deveIopmenl
of lle Kaslagan fieId, in parlicuIar, las suffered serious deIays due lo leclnicaI and
environmenlaI claIIenges and ils main operalor, lle IlaIian oiI company Lni, las
encounlered serious cosl over-runs llal evenluaIIy viII spiII over inlo Iosses aIso for
lle governmenl. Tlal las resuIled in a serious dispule belveen Lni and lle
governmenl. Tle Ialler las nov passed a Iav llal essenliaIIy gives il lle rigll lo
relroacliveIy clange any agreemenl as il visles. As sucl aclions are nol
unprecedenled among oiI ricl emerging marIel counlries, mosl observers sliII llinI
Lni and oller privale operalors viII bile lle buIIel and accepl lle governmenl's nev
lerms provided lle governmenl does nol exercise ils nev riglls al random. -- In
addilion lo Iarge oiI resources, KazaIlslan aIso commands Iarge gas deposils, mainIy
Oil and gas production
0
1
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2
3
2003 2005 2007 2009 2011
m
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b
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Output Forecast
3

SEB Merchant Banking Country Risk Analysis March 25, 2008
as associaled gas. Tle counlry is aIso one of lle vorId's riclesl in melaIs sucl as
goId, copper and Iead.

píê~íÉÖáÅ=éçëáíáçå. Being IandIocIed and vill leavy sluff sucl as oiI and melaIs as
main exporl producls, KazaIlslan depends on good reIalions lo ils neiglbors.
IucIiIy lley are severaI and KazaIlslan las sIiIIfuIIy pIayed on lleir differences lo
ils ovn benefil. Mosl lransporl roules sliII go llrougl Russia, bul il is buiIding gas-
pipeIines lo Clina and lo Azerbaijan from vlere il can reacl Weslern marIels
direclIy llrougl lle BaIu-Ceylan pipeIine. Il las aIso Iepl a good reIalionslip lo
lle US and given dipIomalic supporl lo US foreign and securily poIicy inilialives.
Mosl recenlIy il vas inviled lo clair lle OCSL, lle inslrumenlaI Luropean
organizalion for lle promolion of democracy, nol a minor feal for a counlry vill
democralic credenliaIs in lle Iovesl possibIe calegory regarding poIilicaI freedoms
and corruplion according lo observers sucl as lle US Ireedom House and Lurope's
Transparency InlernalionaI.
-´-
|cr|u in t|c !ccc!c. Kczc||stcn cc|ictc! surprisinv|u |cst c |iv| rcn|inv uit| t|c cxtcrnc|
rctinv cvcncics ccsc! cn scun! pc|icics cn! vrcuinv ci|-ric|cs. Icst uccr it su||crc! scmc
sct-ccc|s cs tuc rctinv cvcncics put it cn ncvctitc cut|cc|. rc||cctinv t|c mcrc unccrtcin
cut|cc| |cr its |incncic| scctcr c|tcr uccrs c| cxccpticnc| |iv| vrcut| cn t|c ccc| c| |crcivn
|un!inv. 1|c |cttcr |cs ccccmc mcrc ccst|u c|tcr intcrncticnc| ris| ctcrsicn |cs incrccsc! in
t|c uc|c c| t|c suc-primc crisis. |n cur ticu t|is s|cu|! nct ccmc cs surprisc tc pru!cnt|u
ccuticus intcstcrs cn! mcu t|crc|crc nct ucrrcnt c s|crp c|cnvc in t|cir ticu cn
Kczc||stcn´s crc!itucrt|incss. cs |cnv cs t|c prcscnt v|ccc| crisis !ccs nct turn intc c
prc|cnvc! cccncmic !cprcssicn. As |cnv cs t|c ci| pricc stcus ccctc S¯0 !c||crs/ccrrc|.
Kczc||stcn s|cu|! cc cc|c tc c!just tc |cucr cxpcrt rctcnucs cn! stcn!s c vcc! c|cncc c|
rcvcininv muc| c| its rc|cticns|ip uit| intcrncticnc| ccpitc| mcr|cts in t|c nct tcc !istcnt
|uturc. 8u t|c scmc tc|cn it is c|sc |cir tc nctc t|ct rcccnt v|ccc| !ctc|cpmcnts |ctc cxpcsc!
t|c ccuntru´s ccsic tu|ncrcci|itics.


Key ratios 2008
Population (mill.) 15,4
GDP/capita ($) 6874
GDP (change) 5,0%
Inflation 6,5%
Curr.Acc. Balance/GDP -2,2%
Reserves/imports (months) 4
Budget balance/GDP 2,5%
Government debt/GDP 10%
Graph: The pentagon shows the creditworthiness of
Kazakhstan as "flat" meaning strong on liquidity and
macro balance but weaker on event risk and information
compared with the average EM country or one of its peers,
Russia. Resilience is close to average.
bñíÉêå~ä=ê~íáåÖëW=
Iilcl: BBB/neg
Moody's: Baa2
S&I: BBB/neg
mÉÉêëW
Russia
India
AIgeria
0
2
4
6
8
10
12
Resilience
Liquidity
Information
Absence of event
risk
Macro balance
Kazakhstan Average EM
Russia
How to read the chart?
Moving out from the center
reduces risk.


4

SEB Merchant Banking Country Risk Analysis March 25, 2008

Key data: 2002 2003 2004 2005 2006 2007 2008 2009
GDP (bill.US$) 24,6 30,8 43,2 57,1 77,2 95,1 106,8 117,6
GDP/capita (US$) 1650 2054 2856 3755 5044 6170 6874 7517
GDP (change) 9,8% 9,3% 9,6% 9,7% 10,6% 8,1% 5,0% 5,5%
Investments/GDP 26% 26% 26% 31% 33% 34% 35% 35%
Budget balance/GDP 1,0% 2,0% 1,9% 5,1% 7,4% 3,3% 2,5% 4,2%
Govt debt/GDP 19% 14% 10% 7% 6% 7% 10% 10%
CPI inflation (%) 5,8% 6,5% 6,9% 7,6% 8,5% 10,8% 6,5% 5,5%
Money demand (%) 30% 37% 68% 26% 78% 25%
Stock prices (%change)
Interest rates 5,2% 5,9% 3,3% 3,3% 3,3% 7,0% 7,0% 7,0%
Exch. Rate ($) 153,28 149,58 136,04 132,88 126,09 122,55 125,61 128,75
Trade/GDP (%) 94% 92% 96% 98% 96% 94% 99% 92%
Oil price (Brent) $25 $29 $38 $54 $65 $73 $87 $77
Billions US $
Export of goods 11,6 14,9 22,6 30,5 41,6 48,6 56,5 57,6
Imports of goods 11,6 13,3 18,8 25,5 32,8 41,3 48,8 50,7
Other: -1,1 -1,7 -2,8 -5,4 -9,3 -10,7 -10,1 -9,4
Current account -1,1 -0,1 1,0 -0,3 -0,6 -3,5 -2,4 -
(% of GDP) -4,6% -0,4% 2,4% -0,6% -0,8% -3,6% -2,2% -2,1%
FDI 2,6 2,1 4,2 2,0 6,2 8,2 4,0 4,2
Loan repayments -2,7 -4,6 -7,8 -11,6 -11,6 -13,6 -13,7 -7,6
Net other capital flows 1,8 4,2 6,9 7,6 17,7 6,7 13,7 7,6
Balance of payments 0,6 1,6 4,3 -2,4 11,7 -2,2 1,6 1,7
Reserves 2,6 4,2 8,5 6,1 17,8 15,5 17,2 18,9
Total debt 18,8 22,9 32,7 43,4 74,0 87,4 84,4 95,8
o/w short term debt 1,8 2,8 3,9 8,0 12,4 19,8 20,2 20,4
Source: OEF (Oxford Economic Forecasting) and SEB estimates.
Rating history
Fitch (eoy) BB- BB BB+ BB+ BBB- BBB
S&P (eoy) BB- BB BB+ BB+ BBB- BBB
Type of government: Parliamentary democracy in form, but autocracy in practice
Next elections 2012
Other:
Latest PC deal
Recent IMF programs EFF 1999-2002 (allocated amount not utilized)
SEB (eoy) 14 12
2,4
Spot Rates, KZT/US$
Source: Reuters EcoWin
1996 2000 2004
U
S
D
/K
Z
T
50
70
90
110
130
150
Deposit Rates, 1 Month
Source: Reuters EcoWin
2000 2002 2004 2006
P
e
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c
e
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t
0,0
5,0
10,0
15,0
20,0
Real Effective Exchange Rate
Source: Reuters EcoWin
1995 2000 2005
In
d
e
x
85
95
105
115
125
135
International reserves
Source: Reuters EcoWin
1995 2000 2005
U
S
D

(
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0,0
5,0
10,0
15,0
20,0
25,0

5

SEB Merchant Banking Country Risk Analysis March 25, 2008

fãéçêí~åí> Tlis slalemenl affecls your riglls.


afp`i^fjbo=


AII researcl (reporls, sludies and pubIicalions) is produced for inslilulionaI inveslors onIy. AII researcl
(reporls, sludies and pubIicalions) is produced for privale informalion of recipienls and SIandinavisIa
LnsIiIda BanIen AB (pubI), (lle BanI) is nol soIiciling any aclion based upon il.

Opinions conlained in aII researcl (reporls, sludies and pubIicalion) represenl lle banI's presenl opinion
onIy and are subjecl lo clange villoul nolice. AII informalion las been compiIed in good faill from
sources beIieved lo be reIiabIe. Hovever, no represenlalion or varranly, express or impIied, is made vill
respecl lo lle compIeleness or accuracy of lle conlenls and il is nol lo be reIied upon as aullorilalive.
Recipienls are urged lo base lleir inveslmenl decisions upon sucl invesligalions as lley deem necessary.
To lle exlenl permilled by appIicabIe Iav, no IiabiIily vlalsoever is accepled for any direcl or
consequenliaI Ioss arising from use of llese eIeclronic or prinled documenls or lleir conlenls.

Your allenlion is dravn lo lle facl llal a member of, or any enlily associaled vill, lle banI or ils affiIiales,
officers, direclors, empIoyees or slareloIders of, sucl members may from lime lo lime lave a Iong or slorl
posilion in, or ollervise parlicipale in lle marIels for, lle currencies and securilies of counlries menlioned
lerein.

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6