Current Account and Trading Trends Followed by Kazakhstan - Case Study Example

Country Project Report. Kazakhstan Table of Contents Introduction 3 2.Current Account and Trading Trends followed by Kazakhstan 5 3.Trade Composition of Kazakhstan 7 4.Trade Destination 9 5.Trade Regulation 9 6.Recent Trade Conflicts 10 7.FDI Trends 10 8.Portfolio Investment Trends and Official Foreign Exchange and Gold Reserves 12 9.Trends in Factor Mobility 12 10.Exchange Rate Policy 12 11.Nominal Exchange Rate and Real Exchange Rate Trends 13 12.Financial, Exchange Rate, and Debt Crisis 13 13.Conclusion 13 References 14 1. Introduction Kazakhstan, the nation located in Central Asia is designated as the ninth largest nation in the world following ‘Russia’, ‘China’, ‘United States’, ‘Argentina’, ‘Brazil’, ‘Canada’, ‘India’ and ‘Australia’. As projected by Naval Postgraduate School (2009) in the journal ‘Central Asia Executive Summary Series’, the geographic location of this nation is at the junction point of the two major continents of Europe and Asia. To the west lies the Caspian Sea, which this nation shares with its neighboring nations. Moreover, ‘Astana’ became the current capital of this nation in the year 1997. As for the economic progress figures, the current population rate of this nation has shown a significant growth from being 16.91million in the year 2012 to 17.17 million in the year 2013 with an average of 14.62 million. As far as employment along with unemployment rates are concerned, the current employment rate projects an increase of 6.9 thousand from 2012 to 2013. On the other hand, the unemployment rate decreased in the year 2011 and remained stable in the year 2012 i.e. 5.4% as compared to the year 2010, which accounted 5.8% (Crown, n.d.). This can be better understood with the help of the following graphical representation. Source: (Crown, n.d.). In addition to these, the wage rates also project a drop of 32389 KZT from 2012 to 2013. In terms of real gross domestic product (GDP), Kazakhstan experienced a slight growth of 6% in the year 2013 as compared to the year 2012, which accounted to 5%. This has been depicted in the following. Source: (Crown, n.d.). According to the ‘National Bank of Kazakhstan’, the recent inflation rate showed a hike from being 4.5% in 2013 to 5.4% by 2014. This has been depicted in the form of graphical illustration in the following. Source: (Crown, n.d.). In terms of political situations, this nation has been witnessed to experience terrorism related issues at frequent intervals. It is worth mentioning in this similar concern that except certain close areas such as the ‘Gvardeyskiy urban-type village of the Almaty region’, ‘Baykonur town’ and ‘the southern districts of Karmakchi and Kazalinsk’ that are kept under entry restricted phase till 2015, it is legal to travel in almost every other part of this nation (Crown, n. d.). It can be apparently observed that no sort of public demonstrations are allowed in the nation without proper government permission. In terms of air travel, except Air Astana, no other flight services are allowed to operate in the European Union region. The nation also experiences multiple crime cases in terms of muggings, robber and bothering of foreign tourists. Therefore, the local inhabitants and the foreign tourists are repeatedly advised to practice precautionary measures (Crown, n. d.). 2. Current Account and Trading Trends followed by Kazakhstan With the lowering up of high taxation and licensing barriers to international entrants, this nation has significantly opened up its international trading on a broader perspective. Since the nation possesses enormous supply of crude fuel reserves, a major portion of the foreign export earnings is earned through shipping out of crude oil. However, the import segment is primarily comprised of machines and food products (International Monetary Fund 2011). Countries such as ‘China’, ‘Italy’, ‘Russia’ and ‘Netherlands’ form the major trading partners for Kazakhstan. Unfortunately, trading practices between Central Asia and this nation still remains in a deprived state. However, the recently formulated customs union within Russia and Belarus is expected to provide Kazakhstan with an opportunity of gaining superior market access. On the contrary, the formulation of customs union is also suspected to be resulting in tariff hiking and trade diversification (International Monetary Fund 2011). As per the reports published by the ‘National Bank of Kazakhstan’, Kazakhstan has attained a current account value of $ 311.10 million during the last three months of the year 2013. The country also projected a current account average of $125.66 million between the periods of 1995 until 2013. Adding to this, market reviews predict that rising oil price is the major factor, which led towards the improvement of trade balance amount, resulting in pushing up the current account surplus value at large (JCS Halyk Finance, 2012). This can be better understood with the help of the following pictorial illustration. Source: (JCS Halyk Finance, 2012). Imports made by Kazakhstan Kazakhstan imports a broad variety of items. In terms of percentage projection, products such as ‘electronics’, ‘light appliances’ and ‘heavy machinery parts’ forms about 25 percent of total import of the nation. Apart from these, the nation also imports ‘mineral products’, which forms another 15 percent of the total imports. Other products such as ‘transportation equipment’, ‘unprocessed metal products’, ‘chemicals products’, ‘wool’, ‘coal’ and ‘food / beverages’ forms the remaining portion of the nation’s imports. Moreover, according to the current projections made by the ‘The National Bank of Kazakhstan’, the nation’s import level has touched a hike of $ 4725 million by the end of December 2013 from being $ 4598.80 million until November 2013 (UN Comtrade, n. d.). A graphical representation has been provided below for better comprehension about this subject matter. Source: (UN Comtrade, n. d.). Exports made by Kazakhstan In contrary to imports, a major portion of Kazakhstan’s export includes shipment of crude oil products, which forms about 73 percent of the total export quantity. The nation also exports ‘petroleum Gas (4.9%)’, ‘ferroalloys (4.2%)’, ‘refined copper (4.0%)’ and ‘iron ore (3.4%)’. Apart from these, the nation projected a drop in the total export earning level from $7243.20 million in November 2013 to $ 6184.90 million by December 2013 (UN Comtrade, n. d.). This can be better understood with the support of the following graphical representation. Source: (UN Comtrade, n. d.). 3. Trade Composition of Kazakhstan The trade composition of this nation can be described with the help of the following prepared chart. In Terms of Export No Description of traded goods (SITC Revision 3 - 3 digit level) Share in total Exports Trade balance in current US$000 Trade balance ratio 2000 2010 2000 2010 2000 2010 971 Gold, non-monetary (excluding gold ores and concentrates) 5.19 5.73 161,110 863,979 0.93 1.00 68 Non-ferrous metals 37.83 24.21 1,156,772 3,536,142 0.91 0.94 553 Perfumery, cosmetic or toilet preparations (excluding soaps) 0.05 0.07 -25,504 -229,090 -0.88 -0.91 59 Fruit juices (including grape must) and vegetable juices, unfermented ... 0.03 0.01 -3,032 -32,898 -0.65 -0.94 Source: (United Nations Industrial Development Organizations, n. d.). The trade composition projections in context to export of few products by Kazakhstan have been depicted in the above table within the period of 2000 to 2010. In terms of commodity exports such as gold and non-monetary goods, the nation continued to increase the share of its total production for export purpose. From a business perspective, it can be stated that due to the huge demand of gold related products, the nation strives much hard to continue its effective gold export business. With the continuous growth in economy along with the availability of abundant gold reserves, this nation has been viewed to incessantly raise its gold production and thus attained a higher value of trading balance. It can also be affirmed that these two products i.e. gold and non-monetary goods have certainly provided the nation with a comparative advantage. Subsequently, this effect can be seen as an increase in the trade balance ratio. Similar with the case of Non-ferrous metals export, this also projects a hike in the trading balance ratio due to massive demand of this item in the international market (United Nations Industrial Development Organizations, n. d.). In relation to the export of perfumes and other cosmetic products, Kazakhstan although has maintained an increase in the export share but significantly decreased the total production. As a result, the total current balance has also significantly decreased during the period 2000 to 2010. This further led towards decrease in the total balance ratio. However, in case of fruit juice export, the nation has decreased the export share as well as production (United Nations Industrial Development Organizations, n. d.). The reason for this may due to the appearance of multiple numbers of subsidiaries in the international market. In Terms of Import No Description of traded goods (SITC Revision 3 - 3 digit level) Share in total Imports Trade balance in current US$000 Trade balance ratio 2000 2010 2000 2010 2000 2010 67 Iron and steel 7.82 6.75 736,131 2,125,628 0.51 0.43 285 Aluminum ores and concentrates (including alumina) 0.01 0.00 160,670 221,922 1.00 0.99 Source: (United Nations Industrial Development Organizations, n. d.). From the trade compositions of Kazakhstan that has been depicted above, it is apparently visible that the nation has reduced its import share of iron, steel and aluminum ores between the period of ten years i.e. 2000-2010. However, the above portrayed table projects significant improvement figures in terms of trading balance in current scenario. This reveals that with the economic growth, the nation has subsequently increased its production and thus indulged in limited percentage imports. The trading balance ratio for both the import commodities projects a drop due to the decrease in import quantity (United Nations Industrial Development Organizations, n. d.). 4. Trade Destination In the entire trading process between Kazakhstan and other nations, China forms a major partner. This might be owing to the reason that China is known to be superior in the arena of technology and thus possesses a competitive advantage to fulfill the electronics import needs of Kazakhstan by a major extent. The Chinese Ambassador ‘Le Yucheng’ in recent news, projected that by the end of the year 2014, the China- Kazakhstan trade turnover might reach above $30 billion (Jafarova, 2013). Moreover, Kazakhstan has vast supplies of natural fuel reserves. To the Chinese, this appears like a support to the growing economy of the nation. In this similar context, the Chinese Ambassador has also projected his future plans for signing up oil, gas, infrastructure and communication development projects with Kazakhstan. Apart from the above mentioned facts, the strategic partners are also involved in a collaborative plan of signing up future projects in terms of energy projects, agricultural development and transport sectors (Jafarova, 2013). Apart from China, Italy also forms one of the major trading partners of Kazakhstan. Italy imports about 9.67 % of its total crude petroleum production and exports 1.47 % of its total refined petroleum production. On the contrary, Kazakhstan imports about 6.29% of its total refined petroleum production and exports about 56.77% of its crude oil production. Apart from just oil trades, Kazakhstan also imports 0.16% of its total packaged medicaments production, whereas Italy exports about 3.87% of its total packaged medicaments production (The Observatory of Economic Complexity, n. d.). Thus, based on the above analysis, it can be affirmed that both the nation i.e. China and Italy acts as major trading partners for Kazakhstan other than several nations. 5. Trade Regulation Trading process in Kazakhstan flourished during the mid-period of 1990s due to the promotion of liberalization and privatization. In that particular period, the economy of Kazakhstan became much more open to trade in comparison with the economies of Central Asia and Europe. It was mainly because of the low ‘Tariff Trade Restrictiveness Index’ (TTRI), which designated Kazakhstan as 7th nation in the list of 125 liberal nations. This nation showed more openness towards non-agricultural commodity trading as compared to agricultural commodity trading (The World Bank Group, 2014). As a precautionary measure towards food crisis and domestic food security, the nation imposes periodic restriction on the export of wheat. Moreover, since the beginning of the global economic crisis, the nation had subsequently reduced the tariff percentages on the import of raw materials and equipment. Products such as aluminum wires and palm oil are also subjected to decrease in tariff rates (The World Bank Group, 2014). The Kazakhstan government imposes minimum and maximum tariff quotas for controlling the quantity of import products. For instance, in terms of beef import (fresh or chilled), Kazakhstan government imposes a minimum tariff quota of 15% till the maximum limit of 20 tones and above which 50% price of each kg of the import item will be charged as tariff. In case of pork item, the current tariff quota is nil till 9700 tons above which 75% of per kg of the item will be imposed as tariff. Moreover, in case of poultry meat, imports about 25 % tariff is charged until 110000 tons and above which the tariff rate will be 80% per kg of import (OECD Publishing, 2012). 6. Recent Trade Conflicts Recent news projected signs of conflicts arising in relation to international trade associationss between Kazakhstan and its trading partners. As observed during the ‘Asia-Pacific Conference’ of the ‘World trade Unions’, representatives from Kazakhstan were literally trying to conceive the activities of the free trade unions. Efforts were also made by these representatives towards suppressing the workers’ rights for organizing and conducting strikes in Kazakhstan (International Labour Organization, 2008). Cases related to enactment of new draft law by the Kazak government also came up. This law was prepared with the intention of divesting the rights of the workers for creating independent trade unions and mitigating labor conflicts (Campaign Kazakhstan, 2013). Specially mentioning, even after the draft law was termed as official negative response by the ‘International Labor Organization’, still the Kazak government along with the ’Federation of Trade Unions’ of the nation are making continuous efforts towards carrying this new law in the Parliament. All these critical factors eventually affected the reputation as well as the image of the nation in the global business market. Moreover, these factors also resulted in losing the interests of the chief trading partners of Kazakhstan towards carrying out their businesses in the nation (Campaign Kazakhstan, 2013). 7. FDI Trends As projected by multiple international news agencies, the inflow of ‘foreign direct investment’ (FDI) in Kazakhstan has reached a level of $ 22.5 billion in the year 2012. Kazakhstan, in recent times, is experiencing a steady dynamic inflow of FDI. Previous reports projected a drop in the level of FDI inflow and the global investments during the occurrence of worldwide financial crisis. However, current reports projected a hike in the FDI inflow amount by 14% (Kazinform, 2013; UNCTAD, 2013). FDI projections till the year 2008 have been provided in the table below. 2007 2008 USD % USD % Total 18 453,4 100,0 19809,1 100 Netherlands 3147,8 17,1 4349,4 22 USA 2462,1 13,3 2059,5 10,4 UK 909,3 4,9 1797,2 9,1 France 1022,6 5,5 1203,8 6,1 Canada 314,1 1,7 944,8 4,8 Source: (Embassy of the Republic of Kazakhstan to the Republic of Singapore, n. d.). The segregation of the complete FDI inflow projects relating to Kazakhstan has been depicted in the following. 40% of the FDI inflow is attained from real estate dealings 15% of the inflow from mining industries, 11% if the inflow comes through financial works 9% of the remaining FDI inflow is acquired through manufacturing services. In terms of FDI funded industries, reports revealed that by the year 2009, 19,109 industries were recorded in Kazakhstan all of which received their operational funding from 137 international countries (Embassy of the Republic of Kazakhstan to the Republic of Singapore, n. d.). It has been apparently noted that between the period of 2004-2008, the FDI outflow from Kazakhstan was recorded to be about $ 8.9 billion. During this period, the FDI output of 2008 showed a hike of 60.9% in comparison to that of 2007. These projections describe the significant improvement in the Kazak economy (Embassy of the Republic of Kazakhstan to the Republic of Singapore, n. d.). 8. Portfolio Investment Trends and Official Foreign Exchange and Gold Reserves Mining industry has been the base of Kazakhstan’s economy since long. The country contains vast reserves of economically exploitable minerals and ores. In terms of gold reserves, the country has been ranked 8th in the world. Majority portion of the country’s gold reserves is estimated to be concentrated among 260 deposits areas. The ‘Vasilkovskoye’ mine is situated in the north of Kazakhstan, which is duly considered as the fourth biggest gold mine in the entire world. Multiple geological surveys project the total gold reserve of this nation to be about 1500 tones (Embassy of Kazakhstan, 2008). In addition to this, the Kazakhstan Tenge (KZT) Exchange Rate is the official foreign exchange of Kazakhstan (FX Exchange Rates, 2014). Moreover, the portfolio investment trend in the nation i.e. Kazakhstan remained much small as compared to other nations of the world due to the receive of credit by the domestic borrowers from the banks of the nation (Ibpus, 2012). 9. Trends in Factor Mobility Due to close ties existing between Kazakhstan and Russia, populaces mostly from the states of Central Asia migrates to this nation i.e. Kazakhstan. Due to the downfall of the Soviet Union, Kazakhstan became a transit point for the labor migrants. It subsequently became a recipient of such migrating labor forces, who saw sustainable growth in future (Tulegenov & Macakova, 2013). In terms of borrowing trend, it can be apparently noted that a borrowing of $2.2 billion had made by the Kazakh government in the year 2012 mainly for huge investment projects. A major portion of the borrowed amount was mainly collected from the external business markets. Along with this, the nation also borrowed nearly about 1.2 billion cubic meters of gas from China, Uzbekistan and Russia, Moreover, by the year 2014, the Kazakh government is again planning to borrow another $4.3 billion from the external market (Trend News Agency, 2012). However, the customer lending in the year 2013 was expected to grow by 30 to 40 %. The nation also predicted a boom in the vehicle lending market by 100% during the year 2013 (Interfax-Kazakhstan, 2014). 10. Exchange Rate Policy The government of Kazakhstan is currently following a liberal currency regime. It does not pose any sort of limitation towards movement of capital and operation of commercial industries within the country. This currency liberalization process was enacted by the ‘National Bank of Kazakhstan’ in the year 2002. The main intention of this process was to completely eliminate the restrictions made on capital movement. This process also helped in making effective decisions towards developing the economy of the nation at large (Invest in Kazakhstan, 2014). 11. Nominal Exchange Rate and Real Exchange Rate Trends In short run, nominal exchange rate changes reflect heavily on the variations of real exchange rate. In case of Kazakhstan, due to the continuous improvement in the real exchange rates, the nominal exchange rates have also undergone significant improvement. This improvement can be stated as a result of changes brought in the oil prices and the revenue earned through it. Economic evidences projected that this increase in the oil prices can be linked with the improvement of US dollar exchange rates and especially with the non-oil segments (Égert & Leonard, 2007). 12. Financial, Exchange Rate, and Debt Crisis Kazakhstan was affected by the financial crisis, which appeared in the nation in the year 2007. With the occurrence of the crisis, it was the banking system of the nation, which got adversely affected. The banks belonging to the nation were found as debt defaulters by the international banks. This particular adverse factor eventually resulted massive unemployment and inability of the common people to pay off their debts. It is worth mentioning that the economy of the nation was largely affected due to increased level of debts along with borrowing and failure to repay the same (Anichshenko, 2009). 13. Conclusion As per the above analysis and discussion, it can be stated that Kazakhstan has made greater development in its current pattern of economy within the previous few years. Moreover, due to the abundance of natural resources that exist within this nation, it is continuously acquiring supreme attention from multiple international giants. Thus, it can be concluded that with sight development in prevailing labor conditions, the country might stand amid the top international giants throughout the globe in future. Apart from this, the nation ought to devise and implement certain effective strategies for developing its banking system and also raising the standard of its economy at large. References Anichshenko, V. (2009). The impact of the financial crisis on the banking system of Kazakhstan. Central Asia Business Journal, 2, 1-2. Crown. (n.d.). Kazakhstan. Retrieved from https://www.gov.uk/foreign-travel-advice/kazakhstan/safety-and-security Embassy of Kazakhstan. (2008). 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Kazakhstan portfolio investment inflows, equities. Retrieved from http://www.theglobaleconomy.com/Kazakhstan/Portfolio_investment_inflows/ TheGlobalEconomy. (2014). Kazakhstan current account, percent of GDP. Retrieved from http://www.theglobaleconomy.com/Kazakhstan/Current_account/ UN Comtrade. (n. d.). Kazakhstan. Overview: 1-2. United Nations Industrial Development Organizations. (n. d.). Composition and value of trade for Kazakhstan. Retrieved from http://www.unido.org/Data1/IndStatBrief/G_Composition_of_Trade.cfm?print=yes&ttype=G&Country=KAZ&sortBy=imp_P_LY&sortDir=&Group= UNCTAD. (2013). Kazakhstan. Definitions and Sources of Data, 2-4. Read More